No Property Damage No Coverage

Purely Economic Losses Are Not Physical Injury to Tangible Property

Liability insurance insures against the risk of loss to an insured for damages caused to person or property. It does not cover economic losses. It should never covers losses where the insured is not paid for services rendered to a customer.

In Greenwich Insurance Company; Indian Harbor Insurance Company v. Capsco Industries, Incorporated, Ground Control, L.L.C., No. 18-60032, United States Court of Appeals for the Fifth Circuit (August 12, 2019) the Fifth Circuit dealt with an appeal from an order that the insurer owed nothing to its insured to defend or indemnify.

After a Mississippi state court found a subcontractor was liable to a company with which it had contracted for what the latter had expended for labor and materials on a construction project. The subcontractor’s liability insurers successfully sought a declaration in federal court that it did not owe a duty to indemnify and the subcontractor appealed.

FACTUAL BACKGROUND

Capsco Industries, Inc. was a subcontractor on the construction of a casino called the Margaritaville Spa and Hotel in Biloxi, Mississippi. In December 2007, Capsco subcontracted with Ground Control to install water, sewage, and storm-drain lines. Ground Control was terminated from the project by the general contractor in October 2008 “for alleged safety violations and failed drug tests of its employees.” Ground Control, LLC v. Capsco Indus., Inc. (Ground Control I), 120 So. 3d 365, 367 (Miss. 2013).

In August 2009, Ground Control filed suit in Mississippi state court against multiple parties, including Capsco, seeking payment for its work on the project. The claims were dismissed on summary judgment based on the trial court’s legal conclusion that because neither party had obtained the required certificates of responsibility from the State Board of Public Contractors, the parties’ contract was void. The Mississippi Supreme Court agreed the contract was void but reversed and remanded for further proceedings based solely on theories of unjust enrichment and quantum meruit.

In July 2014Capsco’s liability insurers, Greenwich Insurance Company and Indian Harbor Insurance Company, filed a complaint for declaratory judgment in the United States District Court for the Southern District of Mississippi, seeking a declaration that they did not owe a defense or indemnity to Capsco regarding Ground Control’s suit.

In state court, a jury awarded Ground Control over $825,000 in damages against Capsco. On appeal, the Mississippi Supreme Court ordered the parties either to accept a remittitur that would reduce the award to $199,096 or to proceed to a new trial. Ground Control, LLC v. Capsco Indus., Inc. (Ground Control II), 214 So. 3d 232, 246-47 (Miss. 2017).

With a second trial in state court in the offing each party in the declaratory action moved for summary judgment. The district court held the two insurers did not owe Capsco a duty to defend.

DISCUSSION

Duty to Indemnify

Whether Greenwich must indemnify Capsco depends on the policy language. Greenwich’s argument is straightforward: the policy requires the insurer to pay for property damage, which the policy states is either actual damage to physical property or the loss of its use. Greenwich argues that it is obvious that expenses for labor and supplies cannot meet the policy requirements.

Capsco was obligated to pay the reasonable value of the services Ground Control provided. It was not paying for property damage or loss of its use; it was paying for labor and materials. Payment for work is a step removed from paying for property damage that necessitated the work. Purely economic losses are not physical injury to tangible property, i.e. property damage.

ZALMA OPINION

Simple, straight forward decision by the Fifth Circuit because the judgment that was the subject of the declaratory relief action did not involve actual physical damage to real or personal property. They asked that the economic loss the insured incurred was payment for labor and materials resulting from a contract for services it did not want to pay but was forced to pay by the state court. Those costs were purely economic and had nothing to do with property damage.


© 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 zalma@zalma.com.

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.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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