First Party Property Insurance only Provides Coverage for a Fortuitous Loss
This insurance coverage dispute concerns damage to a building that resulted from rainwater ponding on the roof and eventually finding its way inside. The issue on appeal is whether the damage is covered under the relevant policy or excluded by one or more of its numerous “exclusions” or “limitations.” In O.L. MatthewS, M.D., P.C. v. Harleysville Insurance Co., No. 19-1994, United States Court Of Appeals For The Sixth Circuit (September 9, 2020) the Sixth Circuit was asked to reverse a motion for summary judgment granted because the loss was due to wear and tear on an old roof and was not fortuitous.
Plaintiff O.L. Matthews, M.D., P.C. (“OLM”) owned a building in Inkster, Michigan and used it as a medical office. OLM bought the building in the early 1980s, and for many years, neither OLM nor its owner, Dr. O.L. Matthews, paid much attention to the condition of the roof. That changed in January of 2017, when the roof started leaking. OLM filed a claim under the “Businessowners policy” (“the Policy”) it held with defendant Harleysville Insurance Company, but Harleysville denied coverage and its agent told OLM that the roof needed maintenance.
After the roof continued to leak OLM promptly filed a claim with Harleysville, which hired David Walenga, a structural engineer, to investigate and determine the “cause of loss.” Walenga examined the roof and reached three major conclusions:
First, Moisture was intruding into the subject building due to the exploitation of breaches in the roof from latent defects and a lack of proper and timely maintenance or repair. The roof lacks sufficient pitch or drainage to prevent ponding. Ponded moisture is capable of intruding into the building via defects such as failed or weak membrane seams, and failed penetration flashings.
Second, based on the corrosion of metal in the ceiling and damage to the ceiling tiles, “[m]oisture ha[d] been intruding into the subject building to some degree for a duration well exceeding the timeframe between the claimed loss period, and [the] inspection date.”
Third, Walenga found “no indication that the roof ha[d] been displaced or damaged by a singular weather-related event, such as wind.”
Relying on Walenga’s report, Harleysville concluded that “loss was caused by the exploitation of breaches in the roof from latent defects and a lack of proper and timely maintenance or repair” and that the Policy “does not provide coverage for this loss.” Harleysville denied OLM’s second claim in December 2017.
OLM hired its own expert who characterized the rainfall that led to the damage to the building in August 2017 as the “straw that broke the camels’ [sic] back,” as “several areas . . . failed and could no longer support the weight of the roof and the ponded water.”
OLM sued Harleysville and Harleysville eventually moved for summary judgment, arguing that several “exclusions” or “limitations” contained in the policy precluded coverage for the damage to the building. The district court agreed, granted the motion, and entered judgment in favor of Harleysville. O.L. Matthews, M.D., P.C. v. Harleysville Ins. Co., 412 F. Supp. 3d 717 (E.D. Mich. 2019).
Here, the parties agree as to the relevant facts, and this appeal turns on a legal issue: the interpretation of an insurance policy. Interpretation of an insurance policy ultimately requires a two-step inquiry:
First, a determination of coverage according to the general insurance agreement; and
Second, a decision regarding whether an exclusion applies to negate coverage.
Exclusionary clauses in insurance policies are strictly construed in favor of the insured, but clear and specific provisions that limit coverage must be given effect because an insurance company cannot be held liable for a risk that it did not assume.
OLM repeatedly emphasizes that the Policy is an “all-risk” insurance policy. An “all-risk” policy creates coverage of a type not ordinarily present under other types of insurance, and recovery is allowed for fortuitous losses unless the loss is excluded by a specific policy provision. But an “all-risk” policy does not cover every risk.
The Policy excludes from coverage “loss or damage caused by or resulting from”: Faulty, inadequate or defective: (1) Planning, zoning, development, surveying, siting; (2) Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction; (3) Materials used in repair, construction, renovation or remodeling; or (4) Maintenance; of part or all of any property on or off the described premises.
According to Harleysville, the drain’s placement led to the ponding of water on the roof, which led to the membrane tearing and the damage to the inside of the building. Expert testimony supports this contention. Even OLM’s expert, testified that “the drain is set too high,” and explained that between the placements of the roof joists and the drain, “the roof deck must support the weight of almost five inches of water before it can discharge into the roof drain.” He also stated that the weight of the water on the roof was caused by “the bad design of the roof,” which included “the bad design of where the drain was.” Harleysville’s expert, stated in his report that “[t]he region surrounding the roof drain is relatively higher than the field of the roof,” which “prevents drainage.” This is also consistent with the roofers’ observations.
The policy also excluded “Wear and tear” which is defined as “[d]eterioration caused by ordinary use; the depreciation of property resulting from its reasonable use.” Wear and Tear, Black’s Law Dictionary 1827 (10th ed. 2014). Damage resulting from normal wear and tear is often excluded from coverage because it is a type of nonfortuitous loss. Unlike the Negligent Work Exclusion, this “Wear and Tear Exclusion” does not have an ensuing-loss clause. So the default, anti-concurrent causation rule applies, and if wear and tear contributed to the loss, the Policy does not cover it.
The record shows that wear and tear was a cause of the loss. OLM’s expert, testified that “the wear and tear that [the roof] has received is from the weight of the water pulling the membrane apart.” To be sure, a broad interpretation of “wear and tear” combined with the application of the anti-concurrent causation rule could lead to coverage being denied in nearly any situation, even with an all-risk policy. But in this case, where the roof had outlived its intended life twice over and had been poorly maintained and monitored during that time the Wear and Tear Exclusion is not the only provision of the Policy that bars coverage in this case.
Under Michigan law, an insured loses coverage under a policy if one of the policy’s exclusions applies to the insured’s particular claims. The Wear and Tear Exclusion and the Leakage Limitation both apply here, and as a result, the damage to the inside of the building did not result from a “Covered Cause of Loss” under the Policy.
An “All Risk” policy only covers those risks of physical loss not excluded. It is not an all claim policy. No “All Risk” policy insures against every possible cause of loss. Insurance, by definition, requires fortuity – an accident – and that is why Harleysville’s position was correct. A roof that leaks because it was old and not maintained did not incur a fortuitous loss and OLM had no right to recover the benefits of the policy.
© 2020 – Barry Zalma
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.
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