The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | December 14, 2017 • 5 min read

Wall Collapse Contractor’s Responsibility

Taja construction llc was renovating a row home when the east wall of the property collapsed. It sought to recover repair costs under its insurance policy through Peerless Insurance Company, but Peerless determined the collapse was caused by Taja.

During renovation of the row home, Taja planned to deepen the home’s basement and create a larger living space. The site’s engineer recommended that, when the crew excavated the basement, they do it in sections. They would be wise to reinforce each section with concrete underpinning, he said.

Taja’s owner directed his subcontractors to excavate without any underpinning, insisting his team do it all at once. Various people, including the engineer, subcontractors and a neighboring construction company, warned Taja’s owner that he needed structural underpinning to proceed safely.

He did not heed the advice.

A few hours after the basement had been fully excavated without any underpinning, the property’s east wall collapsed. Taja filed a claim of $400,000 for repair costs, but Peerless said defects in construction/workmanship and damages from earth movement were excluded in its policy.

The district court granted summary judgment to Peerless, holding the exclusions applied. It deemed the workmanship exclusion in the Peerless policy would “not pay for loss caused by an act, defect, error, or omission (negligent or not) relating to … construction [or] workmanship.”

Because the owner deliberately ignored warnings of potential collapse, workmanship was the main cause of the fall.

In appeals court, Taja argued that even though the workmanship exclusion applied, the policy stated coverage would be restored if there was an “ensuing loss.”

Coverage should have been preserved, said Taja, when a loss excluded under the policy — like workmanship — resulted in subsequent loss otherwise covered, the company said.

Although the wall collapsed due to a workmanship defect, Taja believed it was entitled to recover the losses that resulted from the collapsed wall. The cost of repair was an ensuing loss from workmanship error.

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The court, however, did not agree. It said the wall collapsed due to movement of the earth’s surface, which was excluded in the Peerless policy. Had the structure been underpinned, the court said, the earth’s surface would have had the support it needed. Unfortunately, the structure was not underpinned, and the earth’s surface gave way.

Scorecard: Peerless is not responsible to cover losses stemming from a workmanship error. Taja will need to foot the bill.

Takeaway: Disregarding expert advice and knowingly performing faulty work will preclude coverage for any losses stemming from negligence.

Sublimit Part of Policy, Not an Exclusion

Five years ago, Superstorm Sandy wreaked havoc on the East Coast. Howard Hughes Corp. sustained damage to its commercial buildings located in Manhattan and turned to its insurer, XL Insurance America Inc., to cover the $150 million in storm surge damages.

XL filed suit, seeking a declaratory judgment releasing it from covering HHC’s damages. Its policy excluded property damage in “high hazard flood zones” caused by storm surge from named storms.

Additionally, because HHC held multiple policies with other carriers, XL said its policy limited liability to no more than “its proportion” of $50 million since other insurers provided coverage.

HHC argued the policy provision was ambiguous. The term “high hazard flood zones” referred to another clause in XL’s policy, which limited coverage to losses occurring during a 72-hour period or less. The superstorm did not fit in this clause, said HHC.

The trial court agreed with XL. The judge stated, “There was never … flood coverage for ‘high hazard flood zone’ properties because the initial attachment point is at, or above, an amount equal to the imposed sublimit.

“In other words,” he continued, “coverage for ‘high hazard flood zone’ properties are covered by other insurers and not part of [XL’s] layer of coverage.”

HHC took the case to appeals court. There, the appellate division found the exclusion applied only to the 72-hour limit. Instead of creating an exclusion, the endorsement as a whole created a $50 million sublimit within the policy.

“Moreover, [XL’s] and the motions court’s interpretation — that there is no coverage for HHC’s high hazards flood zone properties — renders superfluous the endorsement’s phrase ‘for more than its proportion of $50 million,’” the court said.

Scorecard: XL Insurance America Inc. is liable for $50 million in storm surge damages incurred by Howard Hughes Corp.’s property.

Takeaway: When writing policies, the best practice is to explicitly state an exclusion to prevent confusion.

Wavier Wording Questionable

A New Jersey security guard for Allied Barton Security Services was hired to monitor Schering-Plough Corporation. While on duty, he tripped over a 50-pound bag of ice melt and fell down the company’s basement stairs. The tumble resulted in limited mobility in his shoulder and arm, severe headaches and body pain.

He filed a workers’ compensation claim with Allied Barton and a negligence suit against Schering-Plough. In court, the worker was awarded $45,500 in workers’ comp and $900,000 for the negligence suit. Schering-Plough appealed.

In its argument, Schering-Plough said the worker signed a waiver when he was hired at Allied Barton. In that waiver, the worker gave up his rights to file a lawsuit related to any work injury, and to prove that the waiver held weight, Schering-Plough pointed to several out-of-state cases where similar workers’ compensation waivers had been up for debate.

Pennsylvania, Alabama, Massachusetts and Washington, D.C., all examined similar cases in which a worker had waived their lawsuit-filing rights.

In each, the state’s supreme court determined the language in the waiver held firm, and the injured worker was not allowed to file suit against the employer, because he or she had already waived those rights upon date of hire.

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The New Jersey appellate court assigned to the case broke from precedent.

It questioned the wording of the waiver. Allied Barton titled the document “Workers Comp Disclaimer,” which, according to the court, was misleading. The company was asking its employees to waive tort suit rights, not workers’ compensation claims rights.

Additionally, the court questioned whether or not the waiver was acceptable under workers’ comp law.

“Not all employment contracts that limit the rights of the employees are contracts of adhesion,” said the court. “Although a court may enforce a contract of adhesion, such contracts are unenforceable, if unconscionable.”

Scorecard: The appellate court determined that the waiver may be unconscionable in nature and moved to send the case to the New Jersey Supreme Court.

Takeaway: A break from precedent opened the door for injured workers to challenge the legality of signed waivers based on their wording.

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

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]