Thursday, September 27, 2012

First Circuit vacates District Court ruling that mortgagee can require flood insurance in excess of amount of mortgage

I posted here about the decision of the United States District Court for the District of Massachusetts in Lass v. Bank of America, in which the court held that under the terms of the mortgage agreement that mortgagee bank could require the homeowner to have more flood insurance than the bank's interest in the property (in other words, more than the mortgage amount).

The United States Court of Appeals for the  First Circuit has now vacated that decision and remanded the case.  In Lass v. Bank of America, __ F.3d __, 2012 WL 4240504 (1st Cir.), the court held that although the pertinent mortgage provision gives the lender discretion over the amount of flood insurance, a supplemental document given to the borrower at her real estate closing may be read to state that the mandatory amount of flood insurance imposed at that time would remain unchanged for the duration of the mortgage. 

The mortgage agreement required the borrower to have flood insurance to "be maintained in the amounts and for the periods that Lender requires." 

A separate document, entitled "Flood Insurance Notification," stated, "At the closing the property you are financing must be covered by flood insurance in the amount of the principle [sic] amount financed, or the maximum amount available, whichever is less.  This insurance will be mandatory until the loan is paid in full." 

Lass obtained flood insurance equal to $40,000, the full amount of her loan.  She subsequently voluntarily increased the coverage to $100,000. 

The lender later told her that she needed an additional $145,086 in flood insurance, to reflect the replacement value of the improvements on the property. 

Lass refused to purchase the additional insurance.  After notice to her, the bank purchased it for her and charged her escrow account for the premium. 

Applying contract interpretation principles, the court held that the mortgage and notification, taken together, are ambiguous as to the lender's authority to demand increased flood coverage on Lass's property. 

Friday, September 21, 2012

You heard it here first

The Defense Research Institute (DRI) will be hosting a conference in Boston on June 6 and 7, 2013 on Insurance Bad Faith and Extra-Contractual Liability.  No details yet.  DRI attracts participants from around the country (especially from states that require continuing legal education) , so I would expect this to be an excellent networking opportunity.   

Tuesday, September 18, 2012

Mass. Appeals Court holds that services by structural engineer hired by architect were "performed for" project owner

Cable Mills intended to renovate an old mill property it owned into mixed use condominium units.  It hired Feingold for architectural services.   Feingold hired William Barry to provide structural engineering services.  Barry fell through the floor at the site.  He sued Cable Mills. 

Cable Mills was insured by Lloyd's, London.  Lloyd's denied coverage for Barry's claim, relying on an exclusion for "bodily injury . . . for operations performed for you by independent contractors or your acts or omissions in connection with your general supervision of such operations." 

Cable Mills argued that the exclusion does not apply because Feingold, not Cable Mills, retained Barry, so his services were "performed for" Feingold, not Cable Mills. 

In Cable Mills, LLC v. Coakley Pierpan Dolan & Collins Ins. Agency, Inc., 82 Mass. App. Ct. 415 (2012), the Massachusetts Appeals Court agreed with Lloyd's that coverage was excluded.  It held, "performance of professional engineering services essential to the project, pursuant to a contract between the property owner and its architect, sufficiently fulfills the common meaning of 'operations performed for you.'" 

Thursday, September 13, 2012

First Circuit holds that dec page cannot create ambiguity in flood policy terms

In McGair v. Am. Bankers Ins. Co., __ F.3d __, 2012 WL 3793130 (1st Cir. 2012), the First Circuit Court of Appeals held that the terms of a declarations page do not create an ambiguity in a flood insurance policy.

The McGairs purchased a flood insurance policy from American Bankers Insurance Company. The policy was part of the federal flood insurance program about which I've written previously. Under the program, private insurers issue and administer flood policies and claim payments are reimbursed by the Federal Emergency Management Agency (FEMA). FEMA provides a standard text for the policies, which are called Standard Flood Insurance Policies, or SFIPs.

The policy stated that it is provided "under the terms of the National Flood Insurance Act," and that it "cannot be changed nor can any of it provisions be waived without the express written consent of the Federal Insurance Administrator."

SFIPs limit coverage for personal property in basements. (According to the court in McGair, the limitation "serves to encourage construction that minimizes the risk of flooding (e.g., elevated foundations and buildings without basements.)" I'll have to suspend my disbelief on that one.)

In 2010 a flood damaged the McGairs' house and personal property in their basement. They sought compensation from American Bankers. American Bankers denied the claim, asserting the basement contents were not covered.

The McGairs sued, arguing that the Declarations Page created an ambiguity as to the scope of their policy. The Declarations Page indicated that the McGairs have a finished basement and that the contents of their home are located in the "basement and above." It provides that the contents of the home are covered by the policy up to $100,000 and identifies none of the SFIP limitations. The parties agreed that the information was used by American Bankers for the purpose of calculating premiums.

The court held, "there can be no ambiguity between the SFIP and the McGair's Declaration page because the terms of the SFIP control . . . Thus, as a matter of law, any discrepancy between the SFIP and an accompanying Declarations Page must be resolved in favor of SFIP."

Monday, September 3, 2012

First circuit rules on gradual detioration and faulty construction or maintenance exclusions

Insureds Paul Gargano and his wife sought coverage from Vigilant, who provided them with a homeowner's policy, for the cost to remedy failed staining on shingles on their house.  The stain was peeling off the shingles.

Vigilant denied coverage on the basis of two policy exclusions.  The first excluded  coverage for "gradual deterioration . . . however caused, or any loss caused by . . . gradual deterioration."  The second excluded losses resulting from faulty acts, errors or omissions in planning, construction or maintenance.  "Construction" was defined as including materials and workmanship used for construction or repair.

In Gargano v. Vigilant Ins. Co., 2012 WL 3632442 (1st Cir.), the United States Court of Appeals for the First Circuit rejected the Garganos' argument that the policy exclusions were ambiguous.  It held that the Garganos' argument that the deterioration of the stain was progressing "rapidly," not gradually, "did not rise above word play."  "While, to be sure, 'gradual' has no mathematically fixed range, the pace of the detaching stain was a long way from a lightning bolt or a falling tree, and in calling it gradual the district court was drawing no fine line."

The court also held that in the faulty construction or maintenance exclusion, "'faulty' does not mean negligent or blameworthy on the part of a homeowner or his contractor, but simply tainted by imperfection."