Need for Money from Insurer Does Not Create Coverage
Insurance does not, as I have said until I was blue in the face, does not cover every possible problem. When an insurer denies coverage the policyholder without coverage will try to save money by convincing the plaintiff to let the policyholder go free in exchange for an assignment of a claim against an insurer where punitive damages might allow it to become rich.
In Schnabel Foundation Company v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania, No. 18-1782, United States Court of Appeals for the Fourth Circuit (July 10, 2019) Schnabel Foundation Company (“Schnabel”) appealed from the district court’s order granting summary judgment to National Union Fire Insurance Company (“NU”).
This case came about after the delay of a building construction project in Bethesda, Maryland. Bainbridge St. Elmo Bethesda Apartments, LLC (“Bainbridge”) owned the land at issue (“the Site”) and built a 17-story mixed-use building on it called “the Monty.” Bainbridge hired Turner Construction Company (“Turner”) as the general contractor for the project and Turner subcontracted with Schnabel, a building foundation company, to provide the “support of excavation” system (“SOE”).
An SOE retains the earth immediately surrounding a building site and provides lateral support to neighboring properties during construction. The SOE at issue consisted of steel beams called “soldier piles” and wooden slats called “lagging.” This SOE framework holds back earth on adjoining properties as excavation and construction occur on the Site. An SOE is crucial until the foundation slab and walls are installed, at which time the construction provides support. When the built structure is complete, the SOE is “abandoned in place.”
Schnabel began constructing the Monty’s SOE by boring holes and installing soldier piles along the Site’s property line. Several buildings abutted the property line, including one that White Flint Express Realty Group Limited Partnership (“White Flint”) owned and leased to business tenants. Schnabel, in an attempt to construct the SOE as close to the property line as possible, drilled larger holes for the soldier piles than it had planned. Because the holes were oversized, the earth around them shifted and sloughed into the holes. Schnabel then had to use a vibrating air hammer to install the remaining soldier piles, which exacerbated the soil movement.
Because of the SOE excavation at the Site the earth under neighboring properties shifted causing damage to those buildings. It is undisputed that Schnabel’s deficient SOE installation caused the soil to shift.
Montgomery County issued a Stop Work Order for the Monty project. Regular construction resumed and Schnabel eventually completed a proper SOE about seven months late. The Monty project continued to completion, but Schnabel’s faulty work on the SOE delayed the contracted completion date for approximately one year.
Turner purchased two insurance policies for the Monty project, which together comprised a Contractor Controlled Insurance Plan (“CCIP”). The policy at issue here is only the umbrella Commercial General Liability (“CGL”) policy Turner obtained from NU (“the Policy”).
THE COVERAGE LITIGATION
Multiple lawsuits followed from everyone involved in the construction and the neighboring properties. Turner accepted $5 million in settlement from Schnabel and assigned its remaining rights to Schnabel. Schnabel then sued NU.
NU denied coverage based on its interpretation of several Policy terms, which are central to the decision of the Fourth Circuit. NU denied coverage because it contends that even if an “Occurrence” caused Schnabel’s damages, they fall under Exclusion D of the Policy: “Damage to Impaired Property or Property Not Physically Injured.” Under Exclusion D, Policy coverage does not apply to Property Damage to Impaired Property or property that has not been physically injured, arising out of: “1. a defect, deficiency, inadequacy or dangerous condition in Your Product or Your Work; or 2. a delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.”
To fall under Exclusion D, the property at issue must satisfy two conditions: 1) it must be a certain type of property—”Impaired Property or property that has not been physically injured”—and 2) it must suffer an enumerated “Property Damage”—”a defect, deficiency, inadequacy or dangerous condition in . . . Your Work; or . . . a delay or failure by you or anyone acting on your behalf to perform a contract.”
The district court held that Schnabel’s claimed repair damages are not covered under the Policy as a matter of law because the faulty SOE work is a business risk, which a CGL policy does not cover. It then held that Schnabel’s delay damages do come under the Policy and resulted from an “Occurrence” because Schnabel’s faulty SOE work caused an accidental “loss of use” of the Site. Nonetheless, the court concluded Schnabel is not entitled to coverage because Exclusion D bars the claim for Schnabel’s delay damages.
In analyzing Exclusion D, the district court first explained that the Site could be either type of property noted in the Exclusion. The Site is “property that has not been physically injured” because Schnabel’s SOE work damaged only the neighboring properties, while the Site “was in its excavating infancy and itself was not physically injured.” Alternatively, the court found the Site is also “Impaired Property” because Schnabel’s deficient work made it “less useful” while it was “shut down” for months of safety and remedial measures.
The Fourth Circuit agreed with the district court that the Policy does not cover Schnabel’s repair damages as a matter of law. The Supreme Court of New Jersey has made clear that CGL policies cover damages to third-party property, not costs to replace a contractor’s own faulty work.
And, as contemplated in the definition of “Impaired Property,” the Site was “restored to use” through Schnabel’s reinforcement of the SOE and eventual fulfillment of its contract with Turner. Even if the Site was not “Impaired Property,” it satisfies the first condition of Exclusion D because it is “property that has not been physically injured.” The Site was temporarily unable to provide lateral support to its neighbors, but that caused no injury to the Site itself.
For Exclusion D to apply, the Site must also have suffered an enumerated damage. Schnabel’s damaging work qualifies as a defect, deficiency, inadequacy or dangerous condition in Your Product or Your Work and a delay or failure by you or anyone acting on your behalf to perform a contract, either of which could produce Property Damage.
Schnabel’s work satisfies either type of enumerated “Property Damage” in Exclusion D. Schnabel’s SOE work was clearly defective, and its failure to timely construct an adequate SOE “on [Turner’s] behalf” caused “a delay or failure . . . to perform a contract” — both Schnabel’s contract with Turner and Turner’s contract with Bainbridge. The second condition of Exclusion D is, therefore, satisfied. The Fourth Circuit agreed with the district court that Exclusion D’s exception does not apply because the SOE never endured “sudden and accidental physical injury.” Exclusion D therefore barred coverage for Schnabel’s claimed damages.
Before accepting an assignment of a claim against an insurance company who has denied coverage to the defendant, it should be obvious that the offer be reviewed by a professional insurance coverage lawyer to advise whether there is high probability that a suit against the insurer will succeed. Here, the trial court and the Fourth Circuit made clear that Schnabel did not get appropriate advice when it accepted the assignment and wasted time and attorneys fees litigating against National Union.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
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 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Over the last 51 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.
Excellence in Claims Handling Courses From Experfy.com
The Excellence In Claims Handling program provides everything a person or entity presenting a claim needs to effectively present the claim and provides the insurance claims person with everything he or she needs to properly represent the insurer.
The insured, risk manager, or corporate counsel will be able to present a first party property claim – whether a fire, theft, or windstorm or some other insured against cause – with little difficulty and professionalism and present a sworn proof of loss acceptable to an insurer.
The insurance claims person completing the course will be able conduct a thorough investigation of the policy and claim. The insurance claims person will also be able to assist an insured to fulfill all of the promises made by the insured to the insurer and the insurer to provide the indemnity promised by the insurance policy.
The series of courses was designed so that the student can obtain the needed information easily while he or she sits down in the morning for a first cup of coffee or any other time in the day in short, easy to consume lessons. For instance “Insurance and Claims” is made up of three modules and 27 lectures while “Investigating the Property Claim” is made up of four modules and 65 lectures. You can review each course, each module and each lecture at the links below.
Each person completing the course will be able to claim that he or she is a professional first party property claims person ready to provide excellence in claims handling and be ready to resolve any claims problem that arises for the benefit of the insurer and the policy holder.
Insurance and Claims: https://www.experfy.com/training/courses/insurance-and-claims
Investigating the Property Claims: https://www.experfy.com/training/courses/investigating-the-property-claim
Insurance Law: https://www.experfy.com/training/courses/insurance-law
Solving Claims Problems: https://www.experfy.com/training/courses/solving-claims-problems