First Circuit holds that flooding from roof is covered because roof is a dry land area

I've been discussing Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), in which the United States Court of Appeals for the First Circuit held that property damage from a flooded roof was proximately caused by the inadequate roof drainage system, a covered loss, not by rainwater, an excluded loss. 

Nova, the insurer, argued that there was no coverage because the water that flooded the building was surface water excluded by the policy.  The court agreed that the water was surface water. It held, however, that the surface water exclusion did not apply.  Although the policy excluded damage from surface water, an amendatory endorsement provided coverage for flooding caused by the unusual or rapid accumulation or runoff of surface waters from any source.  The flood coverage provision defined "flood" as a "general or temporary condition of partial or complete inundation of normally dry land areas."  The court held that the roof is a "dry land area" under the standard technical definition of land, which includes buildings, fixtures and fences. 

First Circuit holds faulty workmanship exclusion does not apply to work done before insureds owned building

In my last post I discussed Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), in which the court held that there was coverage for a flooded roof because the proximate efficient cause of the loss was the failure of a roof drain, a covered loss, not the rainwater that accumulated on the roof, an excluded loss.

The insurer, Nova, also denied coverage of the basis of a faulty workmanship exclusion, asserting that the inadequacy of the roof's drainage system was faulty workmanship.

The United State Court of Appeals for the First Circuit held that the faulty workmanship exclusion did not apply.  It held that the exclusion was "intended to prevent the expansion of coverage under the policy to insuring the quality of a contractual undertaking by the insured or someone authorized by him."  The record showed that the roof was repaired prior to the insureds' ownership and that the insureds did not repair, renovate or replace the roof or its drain.

1st Circuit holds that efficient proximate cause of water damage from leaky roof is failure of drain, not rain

Matthew and Sondra Knowles owned a five story rental property building.  Nova insured the building.

The Nova policy contained an exclusion for water damage, but an amendatory endorsement deleted the exclusion.  (This is why I can't give advice about coverage under a policy unless I have the complete policy.)  An additional endorsement added flood coverage for loss attributable to "flood, meaning a general and temporary condition of partial or complete inundation of normally dry land due to the unusual or rapid accumulation or runoff of surface waters from any source."

The policy also contained a "rain limitation" which excluded coverage if a loss suffered to the interior of the building was caused by or resulted from rain, whether driven by wind or not, unless the building first sustains damage by a covered cause of loss to its roof or walls through which the rain enters.

A tropical storm caused a significant amount of water to accumulate of the roof of the building.  The water overwhelmed the rooftop drain and pooled on the roof, eventually leaking through the building's two skylights, resulting in property damage.

Nova denied the claim in part on the basis of the rain limitation. 

Due to the financial losses, the Knowles defaulted on their mortgage and Fidelity took title to the property.  Fidelity then brought an action against Nova. 

In Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), the United States Court of Appeals for the First Circuit found that the rain limitation did not exclude coverage. 

The court applied the "efficient proximate cause test" or the "train of events test" set forth in Jussim v. Mass. Bay Ins. Co., 415 Mass. 24 (1993).  Under that test, if the efficient proximate cause of a loss is an insured risk then the policy provides coverage even if the final form of the property damage, produced by a series of related events, appears to take the loss outside the terms of the policy.  The court noted that the efficient proximate cause test applies to any policy that does not have an anti-concurrent causation clause. 

Nova's experts had determined that the blocked or inadequate roof drain caused water to accumulate of the roof, flooding it.  Thus, the blocked or inadequate drain set in motion a train of events that caused the interior water damage.  "The failure of the drain must properly be determined the efficient proximate cause of the damage, not the rain."  The court found that the blocked or inadequate roof drain was a covered loss under the  policy, so that the policy provided coverage for the damages. 

When worker's compensation collides with freedom of religion

Worker's Comp Insider has a fascinating article about a lawsuit in which a religious sect called the Hutterites, with similar roots to Mennonites, have been forced to purchase worker's compensation insurance for its communal work crews who receive no wages as such and have sworn not to ever sue anyone on pains of being banned from the sect. 

U.S. District Court rules no 93A violation where damages were not clear

Lynne Ingalls hired a lawyer, Michael Goldstein, to file a bankruptcy petition.  Ingalls told him and signed an affidavit affirming that she had filed a homestead declaration on real estate she owned with her sister.  (A homestead declaration protects certain equity in a home from creditors; until recently the exemption was not effective unless a document was filed with the Registry of Deeds.)  She testified on the issue in bankruptcy court.  Goldstein did not independently confirm the homestead declaration.  Eventually it was discovered that there was no homestead declaration of record.  As a result, the real estate was exposed to the claims of creditors.

Ingalls sued Goldstein for malpractice.  He asserted a defense of comparative negligence.  If successful, that defense would reduce or negate his liability.

Ingalls sent a 93A demand letter to Goldstein's Insurer, Minnesota Lawyers Mutual Company, demanding $100,000.  Minnesota offered $10,000, which Ingalls rejected.  Ingalls won at trial against Goldstein and, after post-trial motions, Minnesota paid the judgment of $98,018.95 including interest. 

In the 93A suit, Minnesota argued on summary judgment that liability was never reasonably clear prior to the jury verdict. 

In Ingalls v. Minn. Lawyers Mut. Ins. Co., 2013 WL 3943537 (D. Mass.), the United States District Court for the District of Massachusetts noted under Mass. Gen. Laws ch. 176D liability encompasses both fault and damages.  If damages are contested in good faith, then liability is not reasonably clear.  "This is especially true in cases involving comparative negligence.  In such circumstances, even if fault has been determined, if the percentage of potential damages attributable to the defendant is the subject of a good faith disagreement, then liability is not clear." 

The court held that although Goldstein's negligence was clear, the damages in the malpractice action were never reasonably clear prior to trial.  Ingalls' 93A demand letter did not lay out damages of $100,000, and her discussions of damages during discovery in the malpractice action continually evolved and involved future damages.  There was no evidence of actual out of pocket damages.  Moreover, there was always the possibility that her damages would be reduced by a comparative negligence finding. 

The court granted summary judgment to Minnesota, holding that it was impossible to conclude from the record that no reasonable insurer would have failed to settle the case.  

Interesting article on captive insurers

Forbes has an interesting article on captive insurers.  The main point is that captive insurers should actually insure actual risk, or else they are simply a fraudulent tax shelter.