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September 15, 2016  

 
 Q&A of the Week
Theft Following Water Damage

An Louisiana subscriber recently asked the following question:

Under the ISO policy, please provide policy interpretation to the water damage exclusion, page 10 of 20 in the HO2, section 1 Exclusion 3
3. Water Damage means:
Direct loss by fire, explosion or theft resulting from water damage is covered.
Please explain how theft might occur from water damage.


ANSWER: While it sounds farfetched, it is easier than you think. The water exclusion is for flood, tidal wave, waves, surface water, and water under the ground exerting pressure on buildings, foundations, and the like. A gallon of water weighs roughly seven to ten pounds; moving flood water can easily break down doors, or even the fact that insureds are having to haul everything out on the lawn to try to dry it out makes it easy for items to be stolen. Therefore, loss by theft related to water damage is covered.
 
 Litigation Watch
The Meaning of "You"

A credit union brought an action for breach of contract against a general contractor alleging defective construction work, and the general contractor brought a third-party action against a subcontractor and the commercial general liability insurer. This case is America First Credit Union v. Kier Construction Corporation, 314 P.3d 1055 (2013).

In 2002, America First Credit Union (AFCU) and Kier Construction entered into a contract for Kier to act as the general contractor in the construction of a branch office for AFCU. Kier subcontracted with Broberg Masonry to supply and install manufactured stone veneer for the building. As part of the contract, Broberg was required to obtain a commercial general liability policy listing Kier as an additional insured.

After completion of the building, AFCU discovered cracking and failing of the exterior masonry work. AFCU filed an action against Kier and Kier filed its third-party action against Broberg and its insurer, Owners Insurance Company. Owners then filed a motion for summary judgment, arguing that the policy did not provide coverage to Kier for AFCU's claims. The district court denied the insurer's motion and this appeal followed.

The Court of Appeals of Utah noted the insurer's argument that the district court erroneously interpreted the general liability policy when it determined that the term "you" refers to the named insured, that is, Kier. Owners contended that, as a result, the district court erred in concluding that the exclusions for damage to "your work" and "your product" did not apply and that coverage existed under the liability policy for the damage claims. The appellate court said that, to determine if the district court erred, it had to address whether the district court properly interpreted "you" and "your" within the context of the exclusions and then determine whether the exclusions apply.

The court found that the words "you" and "your" refer to Broberg as the named insured and not to Kier as an additional insured. The court pointed out that throughout the policy, those two words refer to the named insured shown in the declarations and the only named insured identified in the policy is Broberg. Any other person qualified under the policy is merely an insured and not the named insured. The endorsement added Kier as an addition insured, not a named insured and so, Kier does not qualify as a named insured under any provisions in the policy. The court decided that the district court did indeed err in concluding that Kier was a named insured.

Because the appeals court determined that "you" and "your" as used in the policy refer only to Broberg, the court then noted that the district court erred in evaluating the exclusions from the standpoint of Kier, rather than Broberg. Read correctly, the court pointed out that the exclusions for damage to products and work apply only to Broberg. The damage to your product exclusion excludes coverage for property damage to any goods or products manufactured, sold, handled, distributed, or disposed of by Broberg, such as the stone veneer. Accordingly, the court found that the products exclusion bars coverage for any damage to Broberg's product.

As to the damage to "your work" exclusion, the appeals court said that the district court erred when it concluded that the subcontractor exception to the exclusion restored coverage for damage to the stone veneer. The court said that the district court's conclusion that the exception restored coverage was based on the erroneous determination that "you" referred to Kier, and that work performed by Broberg was thus work performed by Broberg on behalf of the named insured by a subcontractor. However, the court continued, because the subcontractor exception when properly read only restores coverage for work performed on Broberg's behalf by a subcontractor, the exception does not apply. The exception applies when someone else does work for the named insured as a subcontractor, not when the named insured is the subcontractor.

The Court of Appeals determined that, properly interpreted, the exclusions bar coverage for AFCU's damages and Owners Insurance is not liable to cover the damages under the general liability policy as a matter of law. The decision of the district court was reversed and summary judgment was granted to the insurer.

Editor's Note: This decision by the Court of Appeals of Utah reveals the fact that some courts cannot or will not accept the plain, written, and unambiguous definitions found in the liability insurance policy. "You" and "Your" are clearly defined in the policy as referring to the named insured and the district court's error in finding that the terms refer to the additional insured in this case is hard to understand.
 
 Fraud of the Week
Insurance Policy Fraud – Washington
AMOUNT: $4,500


A licensed insurance producer who sold Allstate insurance at a Kennewick insurance agency pleaded guilty to misrepresentation in application for insurance in Benton County Superior Court.

The guilty producer wrote an Allstate homeowners policy for himself for a house that he planned on purchasing in 2013. In order to lower the premium, he modified the policy in effect increasing the deductible to $5,000. Less than a week after he took possession of the home, a faulty renovation caused extensive water damage. After his insurance office closed that day, he went to work and lowered his homeowner policy deductible to $500. The following day he filed a $37,000 claim for the damage. Allstate paid him $4,500 he did not deserve, the difference between the old deductible and the fraudulent deductible. Allstate discovered the fraud and reported it to the office of the insurance commissioner, who revoked the license of the guilty insurance producer. His employment with the Kennewick Insurance Agency was terminated.

As misrepresentation in application for insurance is a gross misdemeanor. The guilty insurance provider was sentenced to eighty hours of community service, two years of supervision, and required to pay $4,500 of restitution to Allstate.

 
   
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