Fifth Circuit Applies Policy as Written
Modern liability insurance policies insure against all causes that might result in a court concluding that the insured is legally liable to a third person for bodily injury or property damage. However, often to the surprise of people insured, liability coverage does not apply to every possible event that might cause it to be legally liable to a third person. This is because insurers limit the broad scope of the insuring agreement to limit the insurer’s exposure by excluding certain described causes of loss.
In Mesa Underwriters Specialty Ins. Co. v. LJA Commercial…, — Fed.Appx. —- United States Court of Appeals, Fifth Circuit, 2016 WL 537117 (Feb. 10, 2016) the Fifth Circuit was asked to overturn a summary judgment granted in favor of an insurer.
Rent City, Inc. (Rent City) hired LJA Commercial Solutions, LLC (LJA) to replace the roof on its commercial building in Mississippi. During LJA’s work on Rent City’s roof, a sudden rainstorm occurred. At the time of the storm, LJA had removed the roof exposing Rent City’s interior to the rain. Water flowed into Rent City’s building before LJA managed to cover the open roof with tarpaulins. This intrusion resulted in extensive damage to the Rent City property.
LJA was insured under a Commercial General Liability (CGL) policy issued by MESA Underwriters Specialty Insurance Company (MUSIC). The CGL policy provided that MUSIC would pay for property damages that LJA was legally obligated to pay if “[t]his insurance applies.”
The CGL policy applied to property damage “only if … [it] is caused by an ‘occurrence.’ “Application of the CGL policy was limited by numerous exclusions including one that is relevant to this action. The Water Damage Exclusion stated: “[t]his insurance does not apply to bodily injury or property damage arising out of any damage caused by water or moisture in any state to include but not limited to rain, sleet, hail or snow.”
MUSIC filed a declaratory judgment action against LJA to determine whether it had coverage under the CGL policy for the claim asserted by Rent City for its property damage. LJA filed a counterclaim against MUSIC asserting inter alia that it acted in bad faith by denying coverage for the damages to Rent City. Rent City also filed a counterclaim against MUSIC and a crossclaim against LJA to recover for its property damage. In its claims, Rent City alleged that LJA acted negligently because it had no tarpaulin sheets on-site when the sudden rainstorm struck.
LJA argues that the district court erred in holding that the CGL policy did not cover the damages to Rent City. Mississippi state law governs the interpretation of this insurance policy. Under Mississippi law, insurance coverage depends on the policy language itself. If an insurance contract is unambiguous, the terms are given their plain meaning and applied as written.
The district court did not find it necessary to reach the threshold issue of whether the Rent City damages were an “occurrence” that triggered coverage. Even assuming an occurrence, the district court found that the Water Damage Exclusion clearly applied.
Finally, LJA asserted that MUSIC acted in bad faith by denying it coverage. However, as the district court found, MUSIC did not act in bad faith because it owed no coverage to LJA under its policy.
Bad faith conduct exists when one party to a contract of insurance does something that deprives the other of the benefits of the contract. When there are no benefits available the refusal to pay a claim can never be an act of bad faith. In this case the exclusion was clear and unambiguous since the damage was caused by “water”.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness 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 founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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