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August 27, 2015  

 Q&A of the Week

Ordinance or Law and Replacement Cost

A Rhode Island subscriber recently asked the following question:

We have a claim in Rhode Island involving a tree on the insured property that fell and damaged a very small portion of siding on the risk. The siding is over thirty years old and no longer available. Rhode Island regulations require we replace all of the siding on the entire house. The policy limits coverage due to ordinance and law to 10 percent. Would these limits apply in this case?

ANSWER: You have an interesting situation. While Rhode Island statutes state that all the siding should be replaced, and that is an ordinance or law, it does not necessarily mean that only the ordinance or law provision applies. The provision is for the increased costs incurred due to the ordinance. However, if this is a replacement cost policy, our interpretation is that all the siding should be replaced, as otherwise you have not restored the insured to his preloss condition, that of having matching siding. Therefore, the ordinance and law provisions should not be invoked because this is how the claim should be settled to begin with, outside of any regulations. The regulation itself agrees with this logic, as follows:
A. Replacement Cost
When the insurance policy provides for the adjustment and settlement of first party claimant losses based on replacement cost, the following shall apply:
(1) When a loss requires repair or replacement of an item or part, any consequential physical damage incurred in making such repair or replacement not otherwise excluded by the policy, shall be included in the loss. The first party claimant shall not have to pay for betterment nor any other cost except for the applicable deductible.
(2) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all such items so as to conform to a reasonably uniform appearance. This applies to interior and exterior losses. The first party claimant shall not bear any cost over the applicable deductible, if any.
(R.I. Admin. Code 11-5-73:9)
Note the last sentence: the state of Rhode Island did not intend for this regulation to allow carriers to invoke ordinance or law restrictions and leave insured's facing potentially extra expenses. The loss should be covered in full.

 Litigation Watch
Separation of Insureds Clause Applied to Employer's Liability Exclusion

An umbrella commercial liability brought an action seeking a declaratory judgment that it owed no coverage for a bodily injury claim filed against property owners by an employee of the lessee under the lessee's umbrella policy that named the owners as additional insureds. This case is Mutual Benefit Insurance Company v. Politsopoulos, 115 A.3d 844 (2015).

Leola Restaurant maintained an umbrella commercial liability insurance policy with Mutual Benefit Insurance Company. The restaurant conducted its business on a property leased from Politsopoulos. The lease required the property owners to be named as additional insureds on the liability policy.

An employee of the restaurant fell from an outside set of stairs and suffered injuries. She commenced a negligence action against the property owners, asserting that there was negligence in maintaining the stairs in an unsafe and dangerous condition. The property owners sought defense and indemnification from Mutual Benefit. The insurer declined coverage, citing the employer's liability exclusion.

The insurer argued that the employee was an employee of the insured for purposes of the exclusion and a broad definition of "the insured" encompasses the restaurant and the property owners. Politsopoulos countered that the exclusion was unclear and coverage should be deemed to be negated only upon injury to an employee of the specific insured seeking coverage. In particular, the property owners pointed to the separation of insureds clause that provided that coverage extends separately to each insured against whom claims are asserted.

The insurer commenced a declaratory judgment action and the trial court ruled in favor of the insurer. An appeal was made and the appeals court reversed. The insurer appealed and the Supreme Court of Pennsylvania heard the case.

The Supreme Court noted that the insurer claimed the results of the appeals court's ruling would be that an additional insured would attain greater liability coverage than that afforded to the named insured. Moreover, the opinion would undermine the exclusivity provisions of the workers comp act by making employers and their insurers pay twice for injuries to employees. On the other hand, the property owners maintained that the separation of insureds clause must be afforded the meaning of the terms actually used and each insured needed to be seen as separate entities, that is, the exclusion in this instance would apply only to the restaurant that employed the injured worker.

The court examined the interrelationship between a separation of insureds clause and an employer's liability exclusion. The court said that the separation of insureds clause indicates that the insurance applies separately to each insured against whom a claim is made. The court said that the clause does not create ambiguity, but merely spreads protection among insureds without negating plainly-worded exclusions. Accordingly, the appropriate focus here is less upon the specific wording of the separation of insureds clause than on the terms of the employer's liability exclusion. That exclusion refers and applies to bodily injury to an employee of "the insured" and the court interpreted this as signifying the particular insured against whom a claim is asserted. The court further noted that the distinction in case law is that separation of insureds clauses affect interpretation of policy exclusions using the term "the insured", essentially modifying that term to mean the insured claiming coverage.

The court concluded that the employer's liability exclusion in the umbrella policy was ambiguous and that it is understood that the ambiguous exclusionary language pertains only to claims asserted by employees of the insured against whom the claim is directed. Since the property owners are not the employer of the injured worker, the exclusion is not applicable. The ruling of the appeals court was affirmed.

Editor's Note: The Supreme Court of Pennsylvania holds that the employer's liability exclusion did not apply to bar coverage for a bodily injury claim filed against property owners by an employee of the lessee. The court held that the use of the phrase "the insured", particularly in a policy that contains a separation of insureds clause, demonstrates that the interests of the different insureds are intended to be several rather than joint. So, in this instance, the injured employee was not an employee of the property owners and her claim against them was not negated by the employer's liability exclusion.
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