The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | August 29, 2017 • 4 min read

School District Protected in Contaminated Water Suit

In August 2016, Butler area school district received test results indicating its water supply was tainted with lead and copper from the school’s pipes. The school district informed students and their families of the contamination in mid-January 2017.

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On February 7, parents filed a class-action lawsuit against the western Pennsylvania school district, seeking an unspecified monetary settlement for allegedly hiding the lead and copper levels for months and putting their children in harm’s way.

The district held a general liability policy through The Netherlands Insurance Co. and an umbrella policy from Peerless Insurance Co. The insurers believed they did not have to defend the district because the water contamination claims fell under their policies’ general exclusions for pollutants. More specifically, the claims fell under exclusions for lead exposure.

On February 17, 2017, Netherlands and Peerless informed the school district that they would not participate in the defense of the school nor would they pay for the parents’ monetary damages recoverable by law. The insurers sought a court declaratory judgment stating that neither had an obligation to defend the school district.

The judge ruled that the policies presented by both insurers exclude damages “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants,’ ” but noted that Pennsylvania courts have found this language to not accurately describe the degradation over time that causes lead exposure from lead-based paint.

Similarly, the lead and copper elements of the school district’s water system degraded over time, rendering the lead and copper bioavailable.

Additionally, the judge said that because there was no specific copper exclusion in the policies, the insurers were obligated to provide defense coverage in the class-action suit.

Scorecard: The two insurance companies, Netherlands and Peerless, have a duty to defend the Butler Area School District.

Takeaway: Where exclusion language is deemed ambiguous, courts more often than not rule in favor of insureds.

Insurer Not Responsible for Landslide Damages

Dimitri and mary chaber owned and operated a motorcycle business in St. Albans, W. Va., when rock and soil slid down a hill at the back of the property. The landslide damaged the shop on February 19, 2014, and the Chabers, covered by Erie Insurance, submitted a claim.

Erie sent an adjuster to examine the property damage totaling nearly $4,000. The adjuster determined that seasonal climate change caused the landslide.

The Chabers believed the landslide originated from an improperly performed excavation. After the adjuster explained to the Chabers that their policy specifically stated earth-movement events were excluded from coverage, the Chabers filed suit.

In February 2016, a state circuit court granted the Chabers a declaratory judgment stating that evidence showed natural and man-made interaction caused the landslide. The policyholder, then, could expect coverage for the landslide, because the policy did not unambiguously exclude damage caused by man-made earth-movement events.

Erie argued that the language within the policy unambiguously excluded coverage for all earth movement, regardless of whether it is man-made or natural.

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In an appeal held in April 2017, the Supreme Court of Appeals of West Virginia reversed the declaratory judgment granted to the Chabers and found the language of the exclusion unambiguously embraced both natural and man-made causes.

Scorecard: Erie Insurance does not have to cover $4,000 in landslide damages incurred by its policyholder.

Takeaway: If a policy excludes a particular event unambiguously, the exclusion should apply regardless of the event’s cause.

‘Pervasive Odor’ Covered Under Policy

Residents were plagued with a pervasive odor coming from the Hillcrest Coatings Inc., plant located near Attica, N.Y.

Hillcrest operated a glass and paper recycling facility and was sued for allegedly creating the odor due to negligent operation. Hillcrest sought coverage from its general liability policy issued by Colony Insurance Co. Colony refused coverage and did not budge.

Hillcrest sued in state court, seeking a declaratory judgment that Colony had a duty to defend and indemnify the plant. The court ruled that Colony must defend Hillcrest, but the indemnification issue proved nonconclusive.

Colony appealed the ruling and countered that its policy contained a hazardous materials exclusion that exempted it from covering the defense for the underlying suit. The exclusion barred coverage for bodily injury or property damage that may have been caused by the discharge of hazardous materials. Within Colony’s definition, waste materials — such as glass or paper — used in the recycling process are a type of hazardous material.

The case was brought in front of a New York appellate panel of five judges. The court ruled in favor of Hillcrest, because “foul odors are not always caused by the discharge of hazardous materials,” the panel said.

Further, no claims of bodily harm or property damage were filed with the underlying suit. Because the hazardous material exclusion was triggered by bodily harm and physical damage, the court determined Colony had a duty to defend Hillcrest.

Scorecard: The cause of the odor could not be linked to a discharge of hazardous materials, therefore the insurer must defend Hillcrest Coatings Inc.

Takeaway: For an exclusion to be triggered, the policy language must directly apply to the situation at hand.

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]