The Johnson Firms wins affirmation from 9th

Circuit of District Court's Grant of Summary

Judgment on Rain Exclusion in ACE Policy

ACE Property and Casualty Insurance Company vs. Vegas VP LP, Case

No. 08-16282, 9th Circuit (Oct. 26, 2009):

In May of 2008, the United

States District Court for the District of Nevada granted Summary Judgment

in favor of ACE Property and Casualty Insurance Company in a coverage

case involving the application of a rain exclusion in the ACE P&C Policy.

The

coverage action involved the owner of a Las Vegas high-rise “Metropolis

Condominium," Vegas VP LP. Vegas VP had presented a claim to ACE

P&C for soft-cost damages which allegedly resulted from rain water damage

to interior building finishes where rainwater had entered the building under

construction during December 29-30, 2004 rainstorms. The insured was

claiming that it should be allowed to recover under the policy for delays and

other soft-costs caused when rain water damaged interior finishes to the

lower floors of the building when the building had not yet been fully

constructed or sealed in with a finished roof, windows or walls on the upper

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floors. The exclusion at issue barred coverage for rain damage to the interior

of the building unless the rain had entered through an opening first caused by

windstorm or hail.

While a great number of facts were disputed, the insured, at best, could

only argue that temporary water protection measures (visqueen/tarping) was

in some fashion damaged, allowing the rain water to enter. ACE P&C dis

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puted the location of any such damage to visqueen and what, if any, water

entered the structure through such claimed visqueen damage as contrasted to

the unfinished roofs, windows and walls having numerous openings, cracks

and gaps with no cover whatsoever. Clearly, as to source, location and vol

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ume of water entering via different pathways, the parties were in sharp dis

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pute. However, the insured acknowledged that it had no evidence that any

damage occurred from a windstorm or hail to any part of the designed or

permanent building elements (roof, windows or walls) that first created an

opening through which any rain entered.

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COURT DECISIONS

Breaking News

9th Circuit backs insurer's interpre

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tation of rain exclusion in builder's

risk policy.

The Court upheld lower court's finding

that the rain exclusion was unambigu

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ous and that tarps and visqueen do not

constitute the buildings' roof, windows

or walls.

Georgia Decisions

Georgia Supreme Court weighs in

on insurer's right to “safe harbor"

from bad faith claim.

The Supreme Court holds that an in

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surer cannot place conditions on its

tender of policy limits in settlement.

Other Recent Cases Of

Interest Around the Country

Massachusetts District Court re

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fuses to extend policy coverage to

non-damaged property.

General Contractor and Owner of hotel

project were denied coverage for re

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working retaining wall when Town in

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spection revealed it was not up to code.

Texas District Court applies rigid

eight corners rule to deny general

contractor's right to coverage under

sub-contractor's policy.

Court looked exclusively to allegations

of the Complaint and would not con

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sider extrinsic evidence to create a right

to coverage under a sub-contractor's

policy.

Complex Insurance Litigation

and Liability Defense

The parties agreed to move forward with early summary judgment in the case and after oral argument, by Mike Johnson

in April, on May 8, 2008, JUDGE SANDOVAL GRANTED ACE P&C SUMMARY JUDGMENT, RULING COVERAGE

IS BARRED BY THE RAIN EXCLUSION. The Court ruled that Exclusion S “excluded coverage for all damage caused by

rain entering the Building unless the ‘roof, windows, or walls ‘first sustain []’ windstorm or hail damage through which rain

enters.

. . .

Though the terms are not defined in the policy, they are not ambiguous. The plain and ordinary meaning of

‘roof’ describes a permanent structure that covers a building. Likewise, the plain and ordinary meaning of ‘window’ and

‘wall’ connotes a permanent partition or window fitting designed to bear the load of a roof and the force of the elements."

The Court also found that “visqueen tarps, however, do not constitute ‘roof, windows, or walls’ within the meaning of the

Policy" and that “this reading of the Policy is consistent with the decision a builder undertakes as to whether to begin work

on the interior before completing the permanent exterior."

Vegas VP appealed the Court’s decision to the 9th Circuit. Oral argument was heard on October 8, 2009. On appeal,

Vegas VP made two main arguments that were addressed by the Court: (1) the builder’s risk policy applied at the inception of

the construction when the building had no roof, windows or walls, and as such, the exclusion was not intended to apply to

this construction and (2) the tarps and visqueen used for temporary protection should be considered the roof, windows or

walls. On October 26, 2009, the 9th Circuit issued its final judgment in the case, finding in favor of ACE P&C and affirming

the District Court’s grant of Summary Judgment. The Court found Vegas VP’s first argument concerning the application of

the exclusion to be an unreasonable reading of the Policy and stated that Nevada law would not support an interpretation of

the Policy which would allow recovery with no effort to protect the property from harm. As for the tarps and visqueen, the

Court stated that “taken in the context of the entire policy, the plain meaning of exclusion S requires construction of a perma

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nent roof, windows and walls before an exception to the exclusion can apply." Ultimately, the Court held that Vegas VP could

not “claim coverage for delays incurred due to rain coming through temporary covering when the contractor did not erect the

permanent exterior contemplated by the policy."

The 9

th

Circuit’s ruling reflects a decision strongly in favor of upholding the integrity of the exclusion. If the contractor

wishes to take the business risk, to accelerate the schedule, by beginning the interior finishes prior to constructing a weather

tight exterior with the designed buildings elements, that is a decision the contractor can make at its peril; it is not a risk the

insurer must accept, and the rain exclusion protects the insurer from that unwanted risk.

Georgia Insurance Coverage Decisions

Fortner v. Grange Mutual Insurance Company,

2009 Ga. LEXIS 637

(October 19, 2009)

:

Fortner, the Plaintiff, was in an

accident caused by a driver insured by the defendant, Grange Mutual Insurance Company. The Grange policy had a $50,000

bodily injury liability limit. The driver, a plumber, also had a business liability policy from Auto Owners Insurance Company

that had a $1 million limit. Fortner offered to settle all claims for the Grange policy limit of $50,000 “contingent upon" Auto

Owners’ payment of $750,000. Grange responded that it would pay the $50,000 contingent upon Fortner signing a full re

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lease with indemnification language and dismissing his claim against the driver with prejudice. Fortner deemed this a rejec

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tion of his offer and went to trial where he won a $7 million verdict against the driver. The driver assigned Fortner its claim

against Grange for bad faith failure to settle. Thereafter, Fortner sued Grange.

The trial court in the instant matter instructed the jury based on the Georgia Supreme Court’s decision in

Cotton States

Mut. Ins. Co. v. Brightman,

276 Ga. 683, 580 S.E. 2d 519 (Ga. 2003), explaining that when “responding to a settlement de

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mand which is conditioned upon the response of another insurance company, an insurer can offer its policy limits in response

and let the plaintiff negotiate with the remaining insurers." The “safe harbor" provision essentially protects an insurer from

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liability under the reasonableness standard based on an allegation that it failed to satisfy a settlement condition over which it

had no control. Guided by the trial court’s instructions, the jury returned a verdict in favor of Grange. The Court of Appeals

found no error in the charge.

Reversing the Court of Appeals, the Georgia Supreme Court found that had Grange responded to the settlement condition

beyond its control (Auto Owners’ payment of $750,000) by simply offering its own policy limits, it would have been entitled

to “safe harbor" from liability. However, Grange conditioned its acceptance on Fortner signing a full release of the driver and

dismissing the claim against the driver with prejudice. The added conditions were within Grange’s control as Grange pro

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posed the conditions. The Court held that the jury considering whether Grange acted in bad faith in failing to settle should

have been allowed to consider whether the conditions added by Grange were a reasonable response to the settlement offer.

The jury instructions given by the trial court with regard to the “safe harbor" provision precluded any consideration of

whether the conditions added by Grange were reasonable. The Supreme Court reversed the Court of Appeals’ judgment ex

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plicitly refraining from opining whether Grange, in adding its own settlement conditions, “acted reasonably" and “like the

ordinarily prudent insurer" in responding to the plaintiff’s settlement offer.

Other Recent Cases Of Interest Around The Country

Tocci Building Corp. v. Zurich American Ins. Co.,

2009 U.S. Dist. LEXIS 93976 (D. Mass. September 25, 2009):

This

suit involves a claim under a builder’s risk policy for certain work done on a retaining wall and related business interruption

losses. The general contractor, Tocci Building Corp., was responsible for overseeing the construction of a hotel in Burlington,

Massachusetts. The construction was insured by a builders risk insurance policy issued by Zurich to the owner. The hotel

construction included an extensive multi-tiered retaining wall that was over 1200 feet long and was constructed by a sub-

contractor from loosely laid large boulders and fill from the construction site.

During the construction of the hotel (but after the wall was completed) a heavy rainstorm caused damage to the retaining

wall. The Town of Burlington issued a stop work order on the construction project and declared the wall unsafe as a result of

the damage from the storm. The work to repair the storm damage was completed less than one week after the Town gave

permission to resume work. Upon inspection of the repair work, the town concluded the retaining wall had not been built

according to the approved plans and notified the general contractor the wall needed to be demolished and reconstructed. The

Town and the general contractor engaged in negotiations about the project for nearly three months when the Town finally

agreed to permit the hotel to open, conditioned upon the general contractor grouting the entire wall. Tocci agreed to grout the

wall, but remained steadfast that the grouting was unnecessary. Once the grouting was complete, the hotel opened--110 days

behind schedule. The sub-contractor who built the retaining wall sued Tocci to recover amounts it was owed under its con

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tract for the construction, and Tocci and the owner counterclaimed, alleging faulty construction. That suit was eventually

settled.

In the instant action, the Court concluded that there was not a covered loss under the Zurich policy for the grouting work.

The Zurich policy defined “Covered Causes of Loss" to mean “risk of direct physical loss to covered property." “Loss" was

expressly defined as “accidental loss or damage." The general contractor claimed that the grouting work was covered under

the policy as the storm created a “risk of direct physical loss" and that physical damage was not otherwise required. The

Court disagreed finding that it was impossible to read the policy as providing coverage for “risk" in the absence of “dam

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age." The Court rejected the argument that the grouting was a continuation of the work done on the section of the wall dam

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aged by the storm where the Town would not sign off on repairs to the storm damaged portion until the entire wall was

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brought into code. The Court reasoned that the storm and resulting physical damage was merely the event that brought the

retaining wall to the inspector’s attention but there was no physical damage or loss that led to the grouting.

Moreover, the Court found that the Zurich policy did not afford coverage for

the general contractor’s soft-cost and rental income loss caused by the delay in

opening the hotel. The policy only covered delays resulting from a Covered Cause

of Loss, and since there was no direct physical damage that necessitated the grout

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ing, the delay was not the direct result of a Covered Cause of Loss. Similarly, the

Court found that there was no coverage under the Due Diligence conditions of the

policy. The policy provided that Zurich would “pay for expenses necessarily in

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curred to reduce the loss." Coverage ended when the storm damage to the wall was

repaired, and because the grouting was not related to the storm damage, there was

no coverage for it under that provision as well.

Finally, the Court rejected the general contractor’s claims under the ordinance

or law and increased cost of construction coverage provisions in the Zurich policy.

The Court found that there was no “covered cause of loss" as there was no “direct

physical damage" to the section of the wall that was grouted; thus, there was no

covered repair work for that section of the wall. The Court concluded that Zurich

properly denied coverage. Accordingly, the general contractor’s challenges to the

claims handling process failed as well, and Summary Judgment was granted to

Zurich.

Colony Insurance Co. v. Peachtree Construction, Ltd.

, 2009 U.S. Dist. LEXIS

96061 (D. Tex. Oct. 14, 2009):

Peachtree Construction entered a contract with the

Texas Department of Transportation to repave a portion of a road in Parker County,

Texas. Peachtree had its own general liability policy with Travelers Lloyds of

Texas Ins. Co. Peachtree subcontracted with Cross Roads, L.P. to provide the

signage, barricades and warning devices for the paving project. The Sub-Contract

with Cross Roads required Cross Roads to indemnify Peachtree and the Texas DOT and to provide primary and excess

liability coverage which would be primary over any other insurance. Cross Roads’ primary liability policy was issued by

Colony Insurance Co. Peachtree was also an additional insured to the Colony Policy. Both the Colony and Travelers policies

contained the standard other insurance language.

After the repaving project had begun, a motorcyclist lost control of his bike on Parker County Road and was killed. His

wife thereafter filed a wrongful death suit against Peachtree. One of the allegations of the suit was that Peachtree failed to use

adequate signage and warning devices to warn drivers of a potentially hazardous drop-off in the road. Peachtree demanded

coverage from Colony as both an additional insured and as an indemnitee of Cross Roads. Colony agreed to defend under a

reservation of rights. The wrongful death suit settled for $2 million. Colony agreed to pay only $350,000 of that settlement

on behalf of Cross Roads, leaving Travelers and another insurer to pay the remaining $1,650,000 on behalf of Peachtree. A

coverage action ensued. Colony’s main contention as to why it was not liable to Peachtree was that its additional insured lan

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guage requires that the additional insured’s liability arise out of the operations of the named insured. It contended that because

FIRM ATTORNEYS

Stay in touch, we are here to be

of service to you.

C. Michael Johnson

404-442-8836

mjohnson@thejohnsonfirm.com

Laurie Dugoniths

404-442-8837

ldugoniths@thejohnsonfirm.com

Thomas Wingfield

404-442-8838

twingfield@thejohnsonfirm.com

Monique W. Hudson

404-442-8842

mhudson@thejohnsonfirm.com

ADMINISTRATOR

Tatum Wingfield

404-442-8856

tatum@thejohnsonfirm.com

Firm No.:

404-442-8834

Firm Fax.:

404-442-8835

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Cross Roads was not a party to the wrongful death suit, the allegations did not contend that Peachtree’s liability arose out of

Cross Roads’ operations.

The duty to defend under Texas law is governed by the eight-corners rule, meaning that only the four corners of the pol

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icy and four corners of the Complaint can be considered to determine the insurer’s obligation to defend. It is the insured’s

obligation to show that the factual allegations of the Complaint “potentially support a covered claim." There are very limited

circumstances under Texas law where extrinsic evidence may be considered to determine a duty to defend, and the Court

found those circumstances were not present in this case.

The underlying suit asserted claims of negligence and gross negligence exclusively against Peachtree for failing to pre

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vent the drop-off and failing to warn of the drop-off. Peachtree contended that the Court needed to look at the subcontract

between itself and Cross Roads to show that the claims asserted implicated Colony’s duty to defend, as Cross Roads’ primary

insurer. However, because the extrinsic evidence contradicted the allegations of the complaint, under Texas law, it could not

be considered. The Court found that Colony had no duty to defend, as there were no allegations of faulty work by the sub-

contractor in the Complaint and the claimed liability based on allegations of faulty work on the part of Peachtree was ex

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cluded from coverage under the other insurance provisions of the Colony policy.

This case is an excellent example of the impact of the application of a rigid eight corner rule. We note interestingly that

Colony also requested reimbursement of its defense costs, including attorneys’ fees expended to defend Peachtree, which it

appears the Court would have granted had Colony actually reserved its right to pursue such reimbursement in its reservation

of rights letter. However, as such a right was not reserved, the Court denied Colony’s request.

Best regards,

THE JOHNSON FIRM, LLC

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