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The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | November 1, 2017 • 5 min read

Batteries Included: Insurer Must Pay for Pollution Damages

Between 1982 and 2009, Exide Technologies Inc. rented property from The Wattles Co. to operate its battery manufacturing facility. After the tenants left, Wattles sued Exide for roofing and floor damages caused by sulfuric acid fumes and acid leaks released during the manufacturing process.

As of June 2016, Wattles was awarded $1.4 million in damages and more than $860,000 in attorneys’ fees.

Exide turned to its insurer, Ace American Insurance Co., for coverage. Ace, however, claimed it had no duty to pay the claim. According to the insurer, Exide had proposed a pollution exclusion for the policy, but it was omitted from the final policy by mistake.

Both parties agreed the exclusion was intended, argued Ace. In addition, the damages done to Wattles’ roof and floor fell under exclusions for general wear-and-tear — a by product of Exide’s battery operations.

The Georgia federal court was unconvinced.

“The problem with Ace’s reformation claim is that, at best, Ace has produced evidence that the parties to the Ace policy may have intended for it to include a pollution exclusion, but no evidence that they actually did so intend,” the judge said.

“The fact that Exide’s contamination of the premises — i.e., its pollution of the building — was an insured risk is dispositive.”

He found Ace was not only liable for the entire loss exceeding a $2 million deductible up to Exide’s $60 million policy limit, but Ace was also liable for losses stemming from Exide’s defense of Wattles’ underlying suit.

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That amount, the judge determined, was still unclear, and he directed the parties to submit supplementary evidence concerning Exide’s defense costs moving forward.

Scorecard: Ace American Insurance Co. can’t rely on an alleged policy error to deny coverage of pollution damages.

Takeaway: The adage “It’s the thought that counts” will not hold in court. A policy and its exclusions require explicit and detailed language.

Secondary Damages Not Excluded

Superstorm Sandy hit the Atlantic coast in 2012, bringing with it wind, storm surge and flood damage claims. In New York, property owner 7001 East 71st St. LLC returned after the storm to a single-story shopping center, where the owner found flooding and damages to the building’s roof, ceiling and walls.

7001 East held a $3 million policy with Chubb Custom Insurance Co. and a $5 million policy with Continental Casualty Co. Repair estimates reached more than $14 million.

The property owner filed claims with both insurers for property damage and lost profits. The damages, 7001 East claimed, allowed for rainwater to enter the building through holes in the roof created by Sandy’s severe winds. Chubb and Continental both denied coverage, pointing to flood exclusions in each policy.

In two separate hearings, 7001 East took the insurers to court.

The court looked at the damages done, finding flood and rainwater intrusion through the roof as the main two causes.

In Chubb’s case: “These are separate and distinct losses caused by separate and distinct physical forces,” said the court judge.

“Because a jury could find that rainwater and flooding caused damage to distinct parts of the shopping center, the policies’ exclusions for flooding do not bar coverage for the parts of the shopping center damaged by rainwater.”

The judge ruled that the water damages only extended from the holes in the roof, which were caused by wind. Therefore, Chubb was responsible for coverage, because its policy did not exclude wind damage.

Continental, however, had a wind exclusion in its policy and was not liable for the damages.

Scorecard: Chubb’s policy contained a covered hazard — wind — which left the insurer responsible for flood damages. Continental’s policy excluded both flood and wind, allowing the insurer to walk away.

Takeaway: Courts will take into account whether or not excluded damages are a direct result of a covered hazard. In such cases, the court looks to the primary cause of damages to determine coverage.

Insurer Not Responsible for Intentional Fraud

The owner of a hair salon in a Florida strip mall felt cheated. The tenant believed the mall owner, JG Gulf Coast Town Center, LLC, and the real estate manager, CBL & Associates Properties, fraudulently inflated the tenant’s utility rates. Its energy bills went from $500 per month to almost $700.

A class action suit was brought against the owner and manager.

CBL and Gulf sought insurance coverage for the underlying action from its insurer, Catlin Specialty Insurance Co.

The insurer argued that, in its policy, it did not cover claims where a client intentionally and knowingly committed wrongful acts. Catlin had no legal obligation to pay any defense costs or damages incurred, according to the insurer.

CBL and Gulf argued they were entitled to insurance coverage because the underlying action involved alleged “negligent acts, errors or omissions in the rendering of professional services” — something explicitly covered by Catlin’s policy. Each asked for declaratory judgment.

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This policy clause came in to question. The court determined an action, error or omission must be negligent in conduct in order for the policy to apply, and because CBL and Gulf were not negligent in their actions but instead intentional, Catlin did not have to pay for the underlying suit.

“Because the only reasonable interpretation of the allegations in the underlying action sound in intentional conduct, and the policy does not cover such acts, Catlin’s motion for judgment on the pleadings is granted and CBL defendants’ motion for judgment on the pleadings is denied,” said the court judge.

Scorecard: Catlin Specialty Insurance Co. does not have to cover the mall owner for a fraud suit.

Takeaway: Businesses must have a plan in place to minimize the risk of employees engaging in fraudulent activities. Insurers typically exclude coverage for such illegal actions.

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]