Knowledge of Ongoing Property Damage Defeats Coverage
People who are accused of tortious conduct are loathe to report the accusation to their insurer. Even though they know someone incurred property damage, and would continue to incur property damage, are obligated by every liability policy written in the United States to promptly report that known loss to the liability insurer. Further, since liability insurance only insures against fortuitous losses a loss that occurred, or began and continues, before the issuance of a policy cannot be fortuitous.
In Zepp Realty, P.A. and Charles Zepp v. Sentinel Insurance Company Ltd., Civil No. RDB-17-1773, United States District Court For The District Of Maryland (February 20, 2018) Zepp Realty, P.A. (“Zepp Realty”) and Charles Zepp sued Sentinel Insurance Company Ltd. (“Sentinel”) seeking damages for alleged breach of contract because Sentinel refused to defend or indemnity Zepp because it was excluded by the known loss provision of the Sentinel policy..
The suit arose because Zepp claimed Sentinel wrongfully refused to defend and indemnify Zepp Realty and Charles Zepp under their insurance policy with Sentinel in a real-estate related lawsuit filed against Zepp.
In October 2014, Robert and Kimberly Rullan (the “Rullans”) sued Zepp in the Circuit Court for Howard County, Maryland (the “Underlying Action”), setting forth allegations against Zepp in Zepp’s capacity as both a real estate developer and real estate agent. In the Underlying Action, the Rullans alleged they purchased property in a subdivision developed and marketed by Zepp, on which they experienced periodic flooding during rain events.
The Rullans first experienced the flooding in the fall of 2011, at which time they notified Zepp of the problem via email. According to the Rullans, Zepp and the homebuilder “acknowledged their responsibility…and undertook efforts to correct such defects.”
The Rullans again reached out to Zepp via email on May 1, 2014 to discuss the flooding problem. This time, they described the flooding with terms such as “a flood plain,” “a swamp,” and “a 40′ wide by 1 ½’ deep river.” After receiving this email, the Rullans claim Zepp again visited the property and undertook repair efforts, which were ultimately unsuccessful.
In October 2014, the Rullans filed suit against Zepp and other defendants over the property defects. Zepp informed Sentinel of the Underlying Action and requested Sentinel defend and indemnify Zepp. Sentinel denied coverage.
Zepp ultimately settled the Underlying Action with the Rullans for $25,000. In defending the Underlying Action, Zepp paid $108,577.50 in attorneys’ fees and $5,825 in mediation and arbitration fees.
Sentinel moved for summary judgment on October 2, 2017.
General Principles of Insurance Policy Interpretation
Under Maryland law, an insurance policy is construed according to contract principles. Under the objective law of contract interpretation, the written language embodying the terms of an agreement will govern the rights and liabilities of the parties, irrespective of the intent of the parties at the time they entered into the contract. Any ambiguity in an insurance policy should be construed liberally in favor of the insured and against the insurer as drafter of the instrument.
The obligation of an insurer to defend its insured under a contract provision is determined by the allegations in the tort actions. If the plaintiffs in the tort suits allege a claim covered by the policy, the insurer has a duty to defend. Even if a tort plaintiff does not allege facts which clearly bring the claim within or without the policy coverage, the insurer must still defend if there is a potentiality that the claim could be covered by the policy.
Allowing an insurance company to refuse to defend an insured based solely on allegations in a complaint filed by an uninterested third-party leaves the insured with no choice but to rely on a plaintiff to file a well-pleaded complaint in order to establish a potentiality of coverage under the insured’s insurance policy. An insurance company, however, in Maryland may not use extrinsic evidence to contest coverage if the underlying complaint establishes a potentiality of coverage.
Zepp claims Sentinel had a duty to defend and indemnify Zepp in the Underlying Action under the Policy. Sentinel, however, contends it had no such duties because the Underlying Action was not covered by the Policy under the Policy’s known loss provision.
General Scope of Coverage Under the Policy
Most relevant here is the exclusion for known losses (the “Known Loss Provision”). Specifically, the Policy states coverage only applies where, prior to the policy period, no insured knew that the bodily injury or property damage had occurred, in whole or in part. If such a listed insured knew, prior to the policy period, that the bodily injury or property damage occurred, then any continuation, change, or resumption of such bodily injury or property damage during or after the policy period will be deemed to have been known prior to the policy period.
The policy explains “bodily injury” or “property damage” is deemed to have been known to have occurred when an insured:
“(1) Reports all or any part of the ‘bodily injury’ or ‘property damage’ to us or any other insurer;
“(2) Receives a written or verbal demand or claim for damages because of the ‘bodily injury’ or ‘property damage’; or
“(3) Becomes aware by any other means that ‘bodily injury’ or ‘property damage’ has occurred or has begun to occur.”
Where the policy contains its own known loss provision, and where Zepp clearly received written claim for damages or was aware of property damage has occurred or began to occur, as in this case, the provision should be enforced as written. The District court agreed.
A known loss provision in an insurance policy that bars liability for mere knowledge of events that may potentially create liability in the future must be enforced according to its own terms, even though the common law known loss doctrine only bars coverage when liability is substantially certain.
Maryland contract interpretation principles support enforcing known loss provisions in insurance policies as written. Enforcing a known loss provision in an insurance policy according to the terms of the provision itself, as opposed to enforcing it in accordance with the common law known loss doctrine, is most faithful to Maryland’s principles of contract interpretation.
Potentiality of Coverage of Underlying Action Under the Policy
Without turning to extrinsic evidence, the allegations of the Underlying Action alone establish there was no coverage under the Policy. The Underlying Action alleges Zepp knew as early as the fall of 2011 about the periodic flooding problem on the property. The Known Loss Provision of the Policy applies where the insured became aware by any means that property damage had occurred or had begun to occur. Thus, Zepp’s knowledge of the periodic flooding in the fall of 2011, however limited that knowledge was, is sufficient to exclude from coverage his resultant liability under the terms of the Policy’s Known Loss Provision.
The Rullans’ emails and Zepp’s own observance of the property show Zepp had notice that the Rullans were experiencing damaging flooding prior to the Policy’s effective date.
The Policy’s Known Loss Provision did not require Zepp know of its liability for the damage with certainty. Additionally, it is irrelevant under the Policy whether the flooding as alleged in the Underlying Action was worse than described in the original emails to Zepp because the policy specifically states, “any continuation, change or resumption of… ‘property damage’ during or after the policy period will be deemed to have been known prior to the policy period.”
Even viewed in the light most favorable to Zepp, this extrinsic evidence establishes the periodic flooding alleged in the Underlying Action was a “known loss” under the Policy. Because there was no potentiality of coverage under the Policy, Sentinel did not breach its contract with Zepp in refusing to defend and indemnify Zepp in the Underlying Action. Accordingly, Sentinel is entitled to judgment as a matter of law.
The lesson Zepp learned is to never wait to report a potential loss to his insurer and to inform every insurer from whom he seeks insurance to report the existence of a potential loss. Zepp knew the Rullan’s property was suffering damage and that they were upset and required the problem be fixed. It was not fixed, suit was file, and there was no coverage because Zepp knew about the property damage before he acquired the policy from Sentinel.
© 2018 – 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 email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Mr. Zalma’s books available as Kindle books or paperbacks at Amazon.com can be reached at http://zalma.com/zalma-books/
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