Georgia Insurance Coverage Decisions

Owners Ins. Co. v. Smith Mechanical Contractors, Inc.

, 2009 WL 3063006

(Ga. Sept. 28, 2009):

The insured owns and operates heavy cranes and was

retained by Birdsong Peanut Company to load a peanut cleaner on to a truck

for shipment to a different plant. While the crane was lifting the peanut

cleaner, the ground gave way under a leg of the crane causing the crane to

collapse onto the peanut cleaner.

The insured timely gave notice to its insurer, who in turn denied the liability

claim under the CGL Policy’s “care, custody and control" exclusion. Smith

agreed to cover Birdsong’s cost of purchasing a replacement peanut cleaner.

Coverage litigation ensued and both the insured and insured filed motions

for summary judgment. The insurer not only contended that the exclusion

applied but alternatively argued that if the Court were to find that Smith was

not in control of the peanut cleaner at the time of the accident so as to trigger

the “care, custody and control" exclusion then Smith had no liability for the

loss and as such, its settlement with Birdsong should be considered a volun

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tary payment.

The Court did not, in its decision, identify any part of the policy which

would re.ect that the liability policy was on a form designed to cover the

liability risk of a crane operators. Hence the policy involved may have been

simply a standard form CGL cover.

In any event, the Court considering the subject exclusion held that Birdsong,

the entity hiring the crane services, remained in control of the operation be

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cause “Birdsong’s maintenance supervisor had the recognized authority to

control the starting, stopping, and speed of the job; the job was performed

exclusively on Birdsong’s site; and Birdsong retained custody and control of

the peanut cleaner, even while it was being moved." The Court said that at

most it could find that there was shared temporary control but it did not find

that sufficient to trigger the exclusion.

As regards the insurer’s alternative argument, the Court found that the

shared control was sufficient as to create liability for Smith. More impor

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tantly, the Court found that Smith’s payment could not be considered volun

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tary in as much as the insurer had

waived its right

to contend it was a volun

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tary payment when it refused to defend Smith against Birdsong’s claims,

which the Court recognized it could have done under a reservation of rights.

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COURT DECISIONS

Georgia Decisions

The Georgia Supreme Court holds

“care, custody and control" exclusion in

CGL policy inapplicable to crane opera

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tor's damage to property being lifted by

crane.

Court determined that the insured was

mere “instrumentality" to move the

peanut cleaner and “temporary shared

control" was not sufficient to trigger

exclusion.

The Georgia Court of Appeals upholds

two-year limitation period in insurance

policy.

Suit held time-barred where there was

no evidence that insurer waived the

policy's two-year limitation period.

Recent Cases Of Interest

Around the Country

The 5th Circuit, applying Texas law,

holds “insured contract" coverage ex

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tends only to tort causes of action.

The 5th Circuit in construction contract

claim for defective construction holds

that only tort claims trigger an “insured-

contract" exception to the “contractual

liability" exclusion commonly found in

CGL policies.

Massachusetts takes major step to

cleaning up long tail environmental

liability issues by adopting a straight

“pro rata" “time on the risk" method of

allocating liability to both insurer and

insured.

The Court, in frank terms, discusses

the equities between insurer and in

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sured and holds that fairness dictates

a straight “pro rata" allocation by “time

on the risk" to both insurer and insured

when evidence is lacking as to the ac

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tual environmental damage occurring

during each policy period.

Complex Insurance Litigation

and Liability Defense

Bickerstaff Imports, Inc., v. Sentry Select Ins. Co.,

2009 Ga. App. LEXIS 858 (July 17, 2009):

The insured car dealership

suffered losses from the fraudulent scheme of one of its salesmen beginning in August 2001. In February 2003 the insured

submitted a proof of loss to its insurer giving various dates for the discovery of the loss, the latest of which was December

12, 2002. On February 5, 2003 the insurer rejected the claim on the grounds that the fraudulent activity was not a “direct theft

loss" within the scope of the policy. This basis for denial was reiterated in a December 29, 2003 letter from the insurer’s at

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torney wherein the attorney also advised the insured that the insurer would consider “other information" indicating the losses

were covered and that the insurer would contact the insured “shortly." In sum, latest DOL was 12/12/02, last reiteration of

declination was 12/29/03. The Policy contained a two-year period within which the insured must file suit after date of loss.

(Georgia upholds suit limitation periods as short as 12 months from date of loss.)

The record re.ects that the insurer did not initiate further contact with the insured until after December 31, 2005 (more than

three after date of loss). The insured sent a letter to the insurer on December 31, 2005 again setting forth its claim against the

insurer. The insurer’s attorney responded by letter dated January 13, 2006 wherein the insurer maintained its original basis for

denial and called the insurer’s attention to the two-year limitation period provided in the contract. The insured filed suit

against its insurer on December 29, 2006 (now more than four years after date of loss).

As one might expect, the insurer was granted summary judgment on the ground that the suit was barred by the policy’s two-

year limitation period. The insured appealed arguing that a question of fact exists as to when the loss was discovered and

whether the insurer waived compliance with the two-year limitation period because it had written on 12/29/03 that would

consider other information and would contact the insured which it failed to do.

The Court of the Appeals held that using the latest of the dates given by the insured for discovery of the loss, December 12,

2002, the contractual two-year limitation period would have expired on December 12, 2004. Thus, the insured’s complaint,

filed December 29, 2006, was time-barred. The Court acknowledged that an insurer can waive a limitation period where the

insurer enters into negotiations with an insured towards the settlement of the claim. However, the Court found that in this

case, mere offer to consider further information from the insured and comments about contacting the insured did not equate

to an affirmative promise, statement or other act by the insurer or any evidence of actual or constructive fraud to lead the in

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sured into believing that the insurer intended to enlarge the limitation period contained in the contract as to the time in which

the insured had to file suit.

The Court noted that even if the correspondence between the parties could be deemed as negotiations as to settlement of the

claim, such correspondence ended on December 29, 2003, nearly a year before the contractual limitation period expired on

December 12, 2004. In absence of any affirmative waiver of the limitation period by the insurer, the Court of Appeals af

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firmed the grant of summary judgment to the insurer.

Recent Cases Of Interest Around The Country

Century Sur. Co. v. Hardscape Constr. Specialties, Inc.,

2009 U.S. Dist. LEXIS *** (August 7, 2009):

Hillwood Residen

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tial Services, L.P. (Hillwood) and Hardscape Construction Specialties, Inc. (Hardscape) entered into a contract wherein Hard

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scape agreed to construct a swimming pool at one of Hillwood’s residential developments. Hardscape subcontracted with

Elite to construct the swimming pool and Elite Concepts by Michale Nantz (Elite), in turn, hired Wang Engineering, Inc. and

Tornado Excavation, Inc. to design and construct parts of the pool. After the subcontractors completed the pool, Hillwood

sued Hardscape, Elite, Wang, and Tornado in a Texas state court alleging that faulty design and construction caused physical

and aesthetic damage to the pool and some of its surroundings. Hillwood set forth claims of negligence, gross negligence,

breach of contract, breach of implied warranty and express warranty.

Hardscape demanded that Elite defend and indemnify Hardscape pursuant to the Hillwood-Hardscape and Hardscape-Elite

contracts. Elite forwarded the demand to its insurer, Century. Hardscape also made the demand directly upon Century. Cen

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tury then sued Hardscape, Hillwood, and Elite. The United States District Court for the Northern District of Texas granted

Century summary judgment, concluding that the policy’s “occurrence" term did not cover the lawsuit. Hardscape appealed.

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The Fifth Circuit Court of Appeals reviewed the case applying Texas law. Century disputed whether Hardscape demonstrated

that the Hillwood suit fell within the policy’s definition of a covered “occurrence." At the time of the state court’s decision,

the Texas courts were divided on whether or not the term “occurrence" could encompasses damage to the property that was

the subject of the contract. However, by the time the matter reached the Fifth Circuit the Texas Supreme Court had resolved

the split by holding that “allegations of unintended construction defects may constitute an ‘accident’ or ‘occurrence’ under

CGL policies." The Texas Supreme Court further held that a claim does not involve an accident or occurrence when either the

allegations purport that the insured intended the injury or the circumstances confirm that the damage was highly probable

whether the insured was negligent or not.

Relying on the Texas Supreme Court’s decision, the Fifth Circuit held that the Hillwood complaint had alleged an “occur

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rence" because it asserted that the contractor’s and subcontractor’s defective construction was a product of their negligence

and does not allege that the they intended or expected their work to damage Hillwood’s property.

The parties also disputed whether Hardscape met its burden of demonstrating that the Hillwood suit fell within the policy’s

“insured contract" exception to the “contractual liability" exclusion exempting assumed “tort liability" and defining “tort li

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ability" as “a liability that would be imposed by law in the absence of any contract or agreement." The Fifth Circuit found

that the exclusion’s exemption would be triggered only if the petition properly alleges a tort cause of action (opposed to a

contract claim) against Hardscape under the “eight corners" rule applied by Texas courts. According to the court, to fall

within the exclusion’s exception, the Hillwood petition must make specific factual contentions that, when construed liberally,

would constitute a liability that would be imposed by law in the absence of any contract or agreement."

The court looked to the substance of the cause of action focusing on the source of the liability and the nature of Hillwoods’

loss in determining whether to characterize the action as a tort or contract. The court recognized that tort obligations are those

imposed by law--apart from and independent of promises made or the manifested intention of the parties. On the other hand,

the court recognized that a plaintiff’s claim sounds only in contract where liability for the defendant’s conduct arises only

because of a breach of the parties’ agreement. The court found that most of the allegations set forth in Hillwoods’ complaint

were easily classified as giving rise to contract claims, namely, because the damages occurred only to the subject matter of

the Hillwood-Hardscape contract, and because no liability would arise independently of the contract. The court did not find

any ambiguity as to who was responsible for the damaged decking where the Hillwood petition and exhibits left no doubt that

Elite constructed all of the decking pursuant to the Hardscape-Elite contract. Accordingly, the court found no ambiguity to

resolve in favor of Hardscape and coverage.

The Fifth Circuit concluded that while the Hillwood petition alleged a cause of action that fell within the Century policy’s

definition of “occurrence," the policy’s “contractual liability" exclusion operated to exclude the claims arising from the Hill

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wood suit as no tort claim triggered the exclusion’s “insured contract" exception.

Boston Gas Company v. Century Indemnity Company;

910 N.E.2d 290; 2009 Mass. LEXIS 419 (July 24, 2009):

This

case is a significant win for insurers based upon a comprehensive look by the Massachusetts Supreme Judicial Court at allo

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cation among “occurrence" based policies for long tail environmental liability.

Boston Gas produced fuel at various facilities including a site located in Everett, Massachusetts where it operated from 1908

until 1969. In 1995 a routine investigation uncovered contamination at the Everett site and Boston Gas was strictly liable for

all costs associated with the investigation and cleanup of the contamination under Massachusetts law. Boston Gas had pur

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chased CGL policies from several different insurers between 1951 and 1969, three of which were issued by Century as “oc

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currence based" policies which were to indemnify Boston Gas for its “ultimate net loss." The three Century policies varied

slightly in how they defined “ultimate net loss" and “occurrence."

In 1995, after Boston Gas began to clean the Everett site, it wrote to Century placing it on notice that it may seek indemnifi

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cation of the costs associated with its investigation and clean-up. Century “reserved its rights" and in 2002 Boston Gas filed a

diversity action against Century in the US District Court for Massachusetts seeking a declaratory judgment as to Century’s

obligations under the insurance policies. Century counterclaimed and brought third-party claims against other Boston Gas

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insurers. After a three-week jury trial, Century was found liable and Boston Gas

was awarded over $6 million in damages for the costs it incurred in the investiga

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tion and clean-up of the environmental contamination at the Everett Site.

The issue remained as to how the damages were to be allocated among the various

insurers whose policies had been triggered by the environmental contamination at

the Everett Site. Boston Gas argued that Massachusetts law allowed the insured to

chose vertical exhausting requiring Century to pay the entire award with the right

to seek contribution from Boston Gas’s other insurers. Century argued that the

damage should be prorated among all of the insurers on the risk during the life of

the Everett site. The District Court concluded that prior Massachusetts case law

compelled the adoption of the “all sums" joint-and-several allocation method

sought by Boston Gas. The court also issued a declaratory judgment, obligating

Century to pay all future costs associated with the investigation and environmental

cleanup of the Everett site.

Century appealed to First Circuit Court of Appeals challenging the District Court’s

application of the “all sums" joint and several allocation method. The First Circuit

surveyed the merits of both “pro rata allocation" and “the all sums joint and sev

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eral" allocation noting the split of authority among other States. Finding no con

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trolling Massachusetts precedent on the allocation question, the First Circuit certi

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fied the question to the Massachusetts Supreme Judicial Court.

The Supreme Court pointed out that progressive injuries, such as environmental

damage and toxic exposure occurring over a number of years are individual inju

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ries attributable to ongoing events without a single clear cause. In such cases, the

concepts of trigger of coverage and scope of coverage under the CGL policy must

be analyzed. There are four traditional trigger of coverage approaches noted in the

opinion. The Supreme Court previously rejected the “manifestation" trigger theory

in environmental contamination cases involving similar CGL language to that in

the Century policies. The Court ultimately declined to address the trigger issue as it

deemed it outside the ambit of the certified questions. Accordingly, the opinion fo

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cused on the scope of coverage that triggered CGL polices must provide when faced with progressive injuries.

Ultimately, the Court agreed with Century that a pro rata allocation of losses is consistent with, if not compelled by, the most

reasonable construction of the policies before the Court. According to the policy language: (1) Century promised to indem

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nify Boston Gas for the “’ultimate net loss’ that it became ‘legally obligated to pay as damages because of… property dam

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age… to which the policy applies, caused by an occurrence; and (2) the policy explained that “this policy applies to …prop

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erty damage…which occurs anywhere during the policy period". In light of the unambiguous policy language the Court held,

the most reasonable reading of the policies is that the Century policies provided coverage for that portion of Boston Gas’s

liability attributable to the quantum of property damage occurring during a given policy period.

The Court declined to put undue emphasis on the phrase “ultimate net loss" finding that the qualifying phase “during the pol

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icy period" limits the scope of coverage. Nor did the court find anything in the policies’ definition of “occurrence" or “other

insurance" clauses that re.ected an intention to cover losses from damage outside the policy period as urged by Boston Gas.

Moreover, the policies at issue did not contain “non-cumulation" clauses which other courts have deemed inconsistent with

the pro rata allocation where such clauses expressly provide for coverage outside the policy period. The Court found that the

policies were susceptible to only one reasonable interpretation and no reasonable policyholder could have expected that a

single one year policy would cover all losses caused by toxic industrial waste released into the environment over the course

of several decades.

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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As other courts say in self justification for judicially creating then choosing an allocation method, the Court proclaimed the

pro-rata over time allocation a more equitable result than joint and several all sums allocation as it promotes judicial effi

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ciency, engenders stability and predictability in the insurance market, provides incentive for responsible commercial behav

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ior, and produces an equitable result.

The Court was honest enough to admit that allocating losses in instances of long term progressive injuries required it to in

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dulge in a “probable fiction" to come up with a result. However, the Court concluded that “the more reasonable fiction" is

that the progressive injuries took place evenly across all policy periods. Importantly, the Court found it necessary to require

the policyholder to participate in the allocation for all periods where it was self-insured/uninsured. The Court specifically

declined to make an exception for periods where insurance was commercially unavailable, finding that to do so would be

inequitable to insurers where they made the calculated decision not to assume risk and not to accept premiums. So, where it

was unable to buy, or failed to buy available insurance, the insured bears the time on risk pro-rata allocation of liability. Fi

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nally, the Court found that Boston Gas, where it did procure insurance, need only pay its prorated amount of its per occur

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rence self-insured retention for each triggered policy period.

The Court was careful to note that it deferred to trial judges to first determine whether losses can be allocated based on the

amount of property damage that in fact occurred during each policy period. If the evidence was sufficient to met that burden,

then the Court clearly conveyed that was the preferred course of allocation. However, lacking that evidence, to be decided by

the trial court, then the default allocation method would be to allocate the liability based on each insurer’s time on the risk as

explained in the Court’s opinion. The “time on the risk method" is to be employed by Massachusetts’ courts in the absence of

evidence more closely approximating the actual distribution of property damage.

We concur with the Massachusetts Supreme Judicial Court that applying environmental liability equally to insured and in

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surer on a straight time on risk allocation basis, in the absent evidence that can support allocation based upon actual amount

of environmental damage occurring each policy period, is inherently fair given the numerous vagaries of long term environ

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mental liability and may, where adopted by other courts, promote prompt and reasonable resolutions between insurer and

insured.

Best regards,

THE JOHNSON FIRM, LLC

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