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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]

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The R&I Editorial Team can be reached at [email protected]