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The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | April 9, 2018 • 5 min read

Marijuana ‘Modifications’ Not Covered

Kvg properties, inc. took westfield insurance company to court after the insurer refused to pay for damage done by former tenants.

The tenants had been growing marijuana inside KVG’s industrial business units, which the company rented out. The illegal farming “project” was revealed to KVG only after DEA agents executed a search warrant. Immediately, KVG filed eviction actions against the tenants in several units.

KVG also learned the marijuana growing operations seriously damaged its property: The tenants removed walls, cut holes in the roof, added HVAC ductwork and gas lines, and damaged the existing heaters and air conditioning units. The walls, floors and ceilings were damaged due to prolonged exposure to moisture.

KVG obtained eviction orders for the tenants. Then, the company contacted its property insurer, Westfield, with the extent of the damages: $18,183 for the electrical systems, $74,550 for the HVAC systems and $418,162 for replacing and repairing the units in general.

Westfield denied coverage. The policy, the insurer said, excluded coverage for illegal or dishonest acts. While marijuana may be legal at the state level, the insurer said, it’s still an illegal federal offense. Additionally, unauthorized construction was not covered under the policy; the tenants removed walls without permits.

In court, KVG conceded that illegal and dishonest activities were excluded in the policy, however, the company argued the tenants were actually vandalizers who destroyed the property without KVG’s knowledge. The policy included vandalism, KVG said, and therefore the damages should be covered by Westfield.

The court dismissed this theory. Instead it found that the Westfield policy was sound in excluding acts illegal or dishonest in nature. The tenants, while acting without authority or permission from KVG, were there under the guise they would be conducting “office and/or light industrial businesses.” Their operations fell under the dishonest act exclusion.

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Further, the court said, the property policy excluded unauthorized construction. Again, KVG did not condone its tenants’ activities, however its property still went through unauthorized construction, with walls being removed and holes being drilled into the roof. The policy, the court concluded, held firm.

Scorecard: Westfield is not responsible for the property damages caused by illegal marijuana growers who rented out space from KVG Properties.

Takeaway: When renting out part of one’s business or property, be sure to review coverages surrounding the behavior and actions of tenants.

Adjustor Considered Part of Team

The owners of SO Apartments, LLC, learned a wind and hail storm caused damages to one of their rental properties in the state of Texas.

They contacted Everest Indemnity Insurance Company to issue a claim. Everest sent an adjustor to assess the damages, but the property owners were not happy with the results. They believed the adjustor failed to address all of the damages done to their property, and the insurer consequently chose not to act.

To make matters worse, the owners alleged, Everest ignored their “pleas for help,” instead acting unprofessionally.

In the owners’ eyes, their insurer had done the bare minimum. They failed to accept, deny or pay the claim in a timely manner, and they had sent an adjustor who “conducted an outcome-oriented investigation and under-scoped [the buildings’] damages.”

In court, the owners pointed to the policy, which stated that Everest would provide coverage for losses stemming from hailstorm damage. They cited breach of contract. They also named the adjustor as a defendant, citing civil conspiracy.

Everest brought the action to appeals court, because it did not see why the adjustor was included in the claim. It argued its adjustor was improperly joined into the court case because the owners had not brought a solid claim against him.

“The acts of the employees or agents are acts of the principal,” said Everest, and “employees and agents cannot conspire with one another unless they act outside the scope of their employment or for their own personal benefit.”

The owners did not allege the adjustor and Everest conspired outside the scope of employment, the insurer argued. The adjustor should not be included.

The court, however, did not agree with Everest’s logic. The adjustor was not improperly joined, the court confirmed, because he was hired by Everest in the first place. The claim — and the actions that were taken afterwards — stemmed from the adjustor’s decisions. The case, the court said, would move to state court for further investigation.

Scorecard: An adjustor is equally liable for the suit brought against their employer. Everest and the adjustor will both be called as defendants.

Takeaway: Employees of one’s company, whether directly working for the company or hired by contract, represent the company at the time of employment, making them liable for any lawsuits that may arise from their actions.

No Wages Lost Due to ‘Occupational Disease’

Following the terrorist attacks on september 11, 2001, many clean-up crews were called to the World Trade Center site. Zdzislaw Usewicz worked as an asbestos handler during recovery. Later, however, he began to feel sick. A treating physician found Usewicz suffered from depression, asthma, rhinitis, gastroesophageal reflux disease and post-traumatic stress disorder, all stemming from his time spent on site.

Usewicz filed for workers’ comp with his employer Nozbestos Construction Corporation, who accepted the claim. Usewicz was cleared to work under the condition he avoid lead exposure.

Then, on July 28, 2012, Usewicz was let go from his job. Nozbestos said Usewicz could not continue working if he couldn’t wear a mask. Due to excessive coughing, Usewicz was unable to keep the mask on during a full day of work.

Usewicz filed an occupational disease claim, asserting he had been working in a continuously lead-contaminated environment during his employment.

A workers’ comp judge found Usewicz was last exposed to lead in November 2011 while working for Nozbestos. The judge also concluded that the occupational disease claim should be viewed as together with the original workers’ comp claim from Usewicz’s time spent at the World Trade Center.

As of July 28, 2012, Usewicz had no causally-related loss of earning, said the judge. His cessation of employment was related to his initial workers’ comp claim, not lead exposure or occupational disease like he alleged.

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In appeals court, physicians testified that while Usewicz was exposed to lead toxicity throughout his career, the coughing could be linked back to medical conditions from his work at the World Trade Center. Being an asbestos handler was also a principal cause of his disability. The appellate court upheld the judge’s decision.

Scorecard: The court determined that Zdzislaw Usewicz’s disabilities most likely stemmed from a workers’ comp claim from 2001 and not lead exposure. He will not receive benefits for his occupational disease claim.

Takeaway: Working with hazardous waste can lead to various worker health and safety issues. Employer best practice is to have safety at the forefront to avoid claims from even happening.

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

Black Swans

Black Swans: Yes, It Can Happen Here

In this year's Black Swan coverage, we focus on two events: An Atlantic mega-tsunami which would wipe out the East Coast and a killer global pandemic.
By: | July 30, 2018 • 2 min read

One of the most difficult phrases to digest without becoming frustrated or judgmental is the oft-repeated, “I never thought that could happen here.”

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Most painfully, we hear it time and time again in the aftermath of the mass school shootings that terrorize this country. Shocked parents and neighbors, viewing the carnage, voice that they can’t believe this happened in their neighborhood.

Not to be mean, but why couldn’t it happen in your neighborhood?

So it is with Black Swans, a phrase describing unforeseen events, made famous by the former trader and acerbic critic of academia Nassim Nicholas Taleb.

We at Risk & Insurance® define these events in insurance terms by saying that they are highly infrequent, yet could cause massive damages. This year, for our annual Black Swan issue, we present two very different scenarios, both of which would leave mass devastation in their wake.

A Mega-Tsunami Is Coming; Can the East Coast Even Prepare?, written by staff writer Autumn Heisler, profiles an Atlantic mega-tsunami, which would wipe out lives and commerce along the East Coast.

On the topic of whether the volcanic island of La Palma, the most northwestern of the Canary Islands, could erupt, split and trigger an Atlantic mega-tsunami, scientists are divided.

Researchers Steven Ward, a geophysicist at UC Santa Cruz, and Simon Day of University College London, say such a thing could happen. Other scientists say Day and Ward are dead wrong; it’s an impossibility.

One of the counter-arguments is backed up by the statement that there has never been an Atlantic mega-tsunami. It’s never happened before and thus, could never happen here. See exhibit “A” above, re: mass school shootings.

Viral Fear: How a Global Pandemic Kills an Economy, written by associate editor Katie Dwyer, depicts a killer global pandemic the likes of which hasn’t been seen in a century.

Tens of millions of people died during the Spanish Flu outbreak of 1918.

Why it could happen again includes the fact that it’s happened before. The science on influenzas, which are constantly mutating, also supports just how dangerous a threat they pose to millions of people beyond the reach of antibiotics.

Should a mutating avian flu, for example, spread widely, we could see a 10 percent drop in GDP, mostly from non-physical business interruption.

As always here, the purpose is to do exactly what insurance modelers and underwriters do; no matter how massive the event, we create scenarios, quantify possible losses and discuss risk mitigation strategies. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]