2222222222

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.

Advertisement




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.

Advertisement




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

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.

Advertisement




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.”

Advertisement




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.

Advertisement




“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]