Ohio Supreme Court Holds Faulty Workmanship Is Not an Occurrence

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In its recent decision in Westfield Ins. Co. v. Custom Agri Systems, 2012 Ohio 4712 (Ohio Oct. 16, 2012), the Supreme Court of Ohio, answering a question certified by the United States Court of Appeals for the Sixth Circuit, had occasion to consider whether “claims of defective construction/workmanship brought by a property owner [are] claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability policy.”  The court also had before it the certified question of whether the contractual liability exclusion applies to bar coverage for such claims.

The coverage dispute in Westfield arose out of Younglove Construction’s contract with PSD Development to build a feed-manufacturing plant in Sandusky, Ohio.  Younglove brought suit against PSD for non-payment of funds, which resulted in PSD filing a counterclaim for defective construction of a steel bin that had been built by Younglove’s subcontractor, Custom Agri Systems.  Younglove subsequently brought a third-party action against Custom, alleging defective construction and consequential damages resulting from the defective construction.  Custom, in turn, tendered its defense to its general liability insurer Westfield.  Westfield intervened in the lawsuit to seek a declaration that it had no coverage obligation to Custom, as Younglove’s third-party claim did not allege “property damage” arising out of an “occurrence.”  Westfield also sought a declaration with respect to the application of its policy’s contractual liability exclusion.   The Northern District of Ohio acknowledged that there was an open question under Ohio law as to whether construction defect claims qualify for coverage under general liability policies, but nevertheless granted summary judgment in Westfield’s favor.  The matter was appealed to the Sixth Circuit, which certified the question to the Ohio Supreme Court.

Citing to the Ohio Appellate Court decision in Heile v. Herrmann, 736 N.E.2d 566 (1st Dist.1999), as well as insurance treatises and case law from other states, the Ohio Supreme Court agreed with the general proposition that general liability policies are “not intended to protect business owners against every risk of operating a business,” nor are they “intended to insure the risks of an insured causing damage to the insured's own work.”  The court nevertheless stated that these general principles did not end the inquiry, but instead, the court was required to determine whether “Custom's alleged defective construction of and workmanship on the steel grain bin constitute ‘property damage’ caused by an ‘occurrence.’”

The court began its analysis with an overview of what constitutes an “occurrence,” defined by the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  It noted that the term “accident” was not defined by the Westfield policy, but that the term has an inherent “fortuity principle,” and thus is generally defined to mean “unexpected as well as unintended.”  Relying on the concept of fortuity, as well the decisions by lower Ohio courts and by the Arkansas Supreme Court in Essex Ins. Co. v. Holder, 37261 S.W.3d 456 (2008), the court concluded that faulty workmanship is not an occurrence for the purpose of a general liability policy, explaining:

… claims for faulty workmanship, such as the one in the present case, are not fortuitous in the context of a CGL policy like the one here. In keeping with the spirit of fortuity that is fundamental to insurance coverage, we hold that the CGL policy does not provide coverage to Custom for its alleged defective construction of and workmanship on the steel grain bin. Our holding is consistent with the majority of Ohio courts that have denied coverage for this type of claim. The majority view is that claims of defective construction or workmanship are not claims for "property damage" caused by an "occurrence" under a CGL policy.

In light of its holding on this issue, the Ohio Supreme Court did not need to reach the second certified question concerning the application of the Westfield policy’s contractual liability exclusion.

Catastrophic Impairment: Aviva v. Pastore

The Court of Appeal has released an important decision relating to catastrophic impairment:

Aviva Canada Inc. v. Pastore, 2012 ONCA 642 (C.A.)

The insured was injured in a 2002 motor vehicle accident as a pedestrian and sustained an ankle injury. She alleged her gait had been altered and was diagnosed with a pain disorder.  A DAC found her to be catastrophically impaired in 2005 due to a marked mental or behavioural impairment under s. 2(1.1)(g) of the SABS.  An assessment under s. 2(1.1)(g) is carried out with reference to the AMA Guides, which provide for an assessment of function in four categories:

(1)              Activities of daily living (ADL);

(2)              Social functioning;

(3)              Concentration, persistence and pace; and

(4)              Deterioration or decompensation in work or work-like settings.

Pastore was diagnosed with a number of psychological disorders and the DAC concluded that she had a class 4 marked impairment in activities of daily living.  The DAC concluded she was catastrophically impaired on the basis of the one class 4 impairment.  The insurer did not agree with the assessment and the matter proceeded to mediation then arbitration.

At arbitration, the arbitrator agreed with the DAC assessors and held that one marked impairment was enough to comply with the Guides approach to impairment.  In addition, it was appropriate to consider physical pain in assessing mental disorder, as it was not possible to factor out all physically based pain since it was intertwined with mentally based pain. The Director's Delegate upheld the decision, but the Divisional Court overturned the arbitrator.

The Court of Appeal allowed the appeal and reinstated the arbitrator`s decision.  The conclusion that only one marked impairment is sufficient to meet the definition of catastrophic impairment was a reasonable one. In addition, it was not an error for the DAC assessors to consider both physical and mental pain.

Pastore appears to have lowered the bar for catastrophic impairment based on a mental disorder and more claimants may be able to fit themselves into a catastrophic designation than prior to this decision.

Florida Court Allows Extrinsic Facts for Determining Duty to Defend

In its recent decision in Composite Structures, Inc. v. Cont'l Ins. Co., 2012 U.S. Dist. LEXIS 147320 (M.D. Fla. Oct. 12, 2012), the United States District Court for the Middle District of Florida considered if and when an insurer can rely on facts extrinsic to a complaint for the purpose of determining a duty to defend.

The insured, Marlow Marine Sales was named as a defendant in an underlying suit brought by two individuals claiming bodily injuries as a result of exposure to carbon monoxide fumes while working aboard a yacht designed, manufactured and sold by Marlow.  Marlow subsequently tendered the matter to its general liability insurer, Continental.  One month after suit was filed, during which time Continental was still in the process of investigating Marlow’s right to coverage, plaintiffs in the underlying suit filed a memorandum of law specifying the time period during which they were exposed to the fumes.  Continental learned of this filing and relied on the information contained therein to deny coverage based on a pollution exclusion that only applied if the insured did not learn of the occurrence within seventy-two (72) hours of its commencement.   Continental relied on the information contained in the subsequently filed memorandum, which was not otherwise in the complaint, to conclude that this exception to the exclusion was inapplicable.

Marlow agreed that it did not learn of the occurrence within the seventy-two hour window.  It nevertheless contended that it was entitled to a defense since Continental only learned of the facts relevant to the coverage defense from a pleading filed subsequent to the complaint.  Marlow argued that Continental could not rely on such extrinsic facts in determining its defense obligation, but instead its duty to defend could only be determined by the complaint, which contained no facts one way or the other relevant to the application of the exception to the exclusion.  In light of this silence, Marlow contended that Continental was required to have provided a defense.

The court agreed that under Florida law, consideration of the duty to defend is typically restricted to the allegations in the complaint.  Citing to the Florida Supreme Court decision in Higgins v. State Farm Fire & Cas. Co., 894 So. 2d 5(Fla. 2004), however, the court acknowledged an exception to this rule where the insurer’s defense to coverage “is based on factual issues that would not normally be alleged in the underlying complaint.”  While the underlying suit against Marlow contained allegations relevant to the pollution exclusion, it did not contain allegations bearing on the issue of when Marlow became aware of the alleged occurrence.  The court nevertheless went on to consider whether these facts should have been asserted in the underlying suit.  The court answered this question in the negative, explaining that such facts were irrelevant in a products liability suit alleging causes of action for negligence and strict liability:

Neither cause of action requires a plaintiff to allege the specific date on which he informed the defendant of his injuries or the specific date on which the defendant informed its insurer. Indeed, before filing suit, an injured plaintiff is unlikely to be privy to information regarding the date on which a defendant informs its insurer of the incident. Those facts "would not normally be alleged in the underlying complaint," and therefore, the duty to defend can only be determined by examining outside evidence.

The court agreed that these facts extrinsic to the underlying complaint conclusively established that Marlow was not aware of the alleged occurrence within the seventy-two hour period necessary to trigger the policy’s exception to the pollution exclusion.   Thus, underlying the circumstances, the court held that “Continental was well within its rights to deny coverage.”

Motion to Add Municipal Defendant Dismissed

A motion to add a municipality as a defendant was recently dismissed.

In Temporin v. DiVincenzo, 2012 ONSC 5213 (S.C.J.), the plaintiff was injured in a 2007 motor vehicle accident. Although the City of Burlington had been named as a third party, the plaintiff did not move to add it as a defendant until 2012. The plaintiff ordered the police report in 2007, but did not receive officer's notes as counsel had inadvertently neglected to send payment.  The notes were ultimately received in 2010 when a follow up request was made.  They referred to road conditions consisting of "fierce" black ice. The plaintiff argued that the two year limitation period for adding the municipality began in 2010.

Parayeski J. dismissed the motion. The failure to follow up for police notes until 2010 did not give rise to a discoverability issue. The plaintiff had not exercised reasonable diligence and even though there was no prejudice to the municipality, this did not justify it being added as a defendant post-limitation.

This decision is a good example of the maxim that limitation periods are not enacted to be ignored.  The burden is on plaintiffs to act diligently to identify defendants within the appropriate limitation period.

Pennsylvania Federal Court Addresses Reasonable Expectations Doctrine

In its recent decision in Austin James Associates, Inc. v. American International Specialty Lines Insurance Co., 2012 U.S. Dist. LEXIS 144449 (M.D. Penn. Oct. 5, 2012), the United States District Court for the Middle District of Pennsylvania had occasion to consider the application of the reasonable expectations doctrine to a commercial insured.

Austin James was insured under a remediation cost cap insurance policy issued by American International Specialty Lines Insurance Co (“AISLIC”).  Austin James paid its premium to AISLIC in February 2004 with the expectation that the policy would become effective on March 1, 2004 and would have a five (5) year duration.  For reasons not reflected in the opinion, AISLIC changed both the inception date and the policy period at the time of policy issuance.  Years later, when Austin James sought reimbursement for remediation costs under the policy, it first learned that the policy reflected an inception date of May 20, 2004 instead of March 1, 2004, and that the policy period was four years and four months instead of five years.  AISLIC denied Austin James’ demand for reimbursement under the policy on the basis that the policy had already expired.  Austin James subsequently brought a declaratory judgment action against AISLIC alleging breach of contract. 

AISLIC moved to dismiss Austin James’ suit on two grounds, the first being that Austin James’ suit was barred based on its own failure to have read the policy at the time it was issued.  AISLIC argued that under Pennsylvania law, a breach of contract claim cannot be sustained on a contention that a party to the contract did not read or understand the contract.  Austin James countered that based Pennsylvania’s “reasonable expectations” doctrine, applicable in the insurance context, it had no duty to have read the policy, and that its understanding of the policy period controlled.  The court agreed, explaining:

Under [the reasonable expectations] doctrine, an insurance policy exclusion will not apply where the insurer or agent has created in the insured a reasonable expectation of coverage.  Here, plaintiff prepaid for insurance for a particular policy period.  The defendant changed that period unilaterally.  Defendant provided a copy of the policy to plaintiff but did not provide separate notice of this change.  Therefore, plaintiff reasonably expected the policy to accurately reflect the agreed-upon starting date and term length. 

In reaching its conclusion, the court considered and rejected AISLIC’s argument that Pennsylvania’s “reasonable expectations” doctrine applies only in the context of individual policyholders, and not to commercial enterprises – an issue that remains unresolved under Pennsylvania law.  The court noted that in Reliance Ins. Co. v. Moessner, 121 F.3d 895 (3d Cir. 1997), the Third Circuit, applying Pennsylvania law predicted that the doctrine would apply even when the insured is a “sophisticated purchaser” of insurance, i.e., a large commercial enterprise.  AISLIC argued that in Madison Construction Co. v. Harleysville Mutual Ins., 735 A.2d 100 (Pa. 1999), Pennsylvania’s Supreme Court refused to extend the doctrine to commercial enterprises. Observing that the issue was not fully briefed in Madison Construction and that the Supreme Court’s consideration of the issue was limited to a brief mention in a footnote, the Middle District concluded that Madison Construction did not overrule Moessner, noting:

This footnote, which merely explains that the court declined to address an argument, is not the equivalent of the court holding that commercial entities are not protected by the reasonable expectations doctrine.

The Middle District further noted that the Third Circuit continued to apply the reasonable expectations doctrine to commercial insureds even after Madison Construction, as reflected in its decision in UPMC Health System v. Metropolitan Life Ins. Co., 391 F.3d 497 (3d Cir. 2004).   In light of the Third Circuit decisions, and the lack of any clear authority to the contrary from Pennsylvania’s Supreme Court, the Middle District of Pennsylvania rejected AISLIC’s argument that the reasonable expectations doctrine cannot apply to commercial entities. 

AISLIC argued as a secondary basis for dismissal that Austin James’ suit was barred by Pennsylvania’s four-year statute of limitation.  Specifically, AISLIC contended that the statute began running sometime in 2004 when the policy was issued.  The court rejected this, noting that on a breach of contract claim, the statute of limitations began running from the time of AISLIC’s denial of coverage in 2009, not in 2004 when the policy was issued.

Missouri Federal Court Affirms Denial of Coverage Based on Pollution Exclusion

In its recent decision in Doe Run Resources Corp. v. Lexington Ins. Co., 2012 U.S. Dist. LEXIS 140981 (E.D. Mo. Sept. 28, 2012), the United States District Court for the Eastern District of Missouri had occasion to consider whether the total pollution exclusion is ambiguous for failure to define the term “pollutants,” or for failure to include this term to include specific constituents.

The insured, Doe Run Resources Corporation, was named as a defendant in two lawsuits resulting from its mining, milling and smelting operations.  Specifically, both suits alleged bodily injuries resulting from Doe Run’s release of lead, cadmium and other toxic substances from chat and tailing piles located at two different facilities in Missouri.  Doe Run sought coverage for these suits from its general liability carrier, Lexington, which insured Doe Run under successive policies dating back to 1995.  Lexington denied coverage on the basis that the suits did not allege “bodily injury” or “property damage” arising out of an occurrence, as well as on the basis of the application of its policies’ pollution exclusion. 

For the policies issued from 1995 through 2003, the Lexington policies contained a pollution exclusion applicable to:

… bodily injury or property damage (including the loss of use thereof) caused by, contributed to or arising out of the actual or threatened discharge, dispersal, release, or escape of smoke, vapors, soot, fumes, acids, alklis, toxic chemicals, liquids or gases, waste materials or other irritants, pollutants or contaminants into or upon the land, the atmosphere or any course of body of water, whether above or below ground.

Notably, these policies did not define the term “pollutants.”  For the policies issued beginning in 2004, the pollution exclusion barred coverage for:

… "bodily injury" or "property damage" which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.

These policies define “pollutants” in relevant part as “any solid, liquid, gaseous, or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

After concluding that Missouri law governed the Lexington policies, the court considered Doe Run’s arguments on summary judgment as to why the pollution exclusions were inapplicable.  Doe Run argued that the policies did not specifically exclude lead or other commercial products or commercial materials, and that the Lexington policies did not define “pollutants” to include lead and the other constituents at issue.

The court began its decision by noting that the language policies’ pollution exclusions were clear and unambiguous, even the pre-2004 exclusions that did not specifically define “pollutants.”  Relying on a standard dictionary definition, the court agreed that that the term “pollutants” is commonly understood as something that pollutes or contaminates the environment, especially with man-made waste.  Finding that the underlying suits alleged releases of pollutants from Doe Run’s facilities, thereby contaminating the environment, the court agreed that the suits “describe pollutants, as that term is used in its typical and ordinary sense.” 

Doe Run nevertheless argued that the decision in Hocker Oil Co. v. Barker-Phillips-Jackson, Inc., 997 S.W. 510 (Mo. Ct. App. 1999) required a different outcome.  Hocker involved the application of the pollution exclusion to an insured gas company’s accidental release of 2,000 gallons of gasoline into the ground.  The Missouri Court of Appeals held the exclusion was ambiguous as to whether gasoline was a “pollutant” for the purpose of a pollution exclusion, since in the eyes of that particular insured, gasoline was not a pollutant but instead the only product it sold.  The Doe Run court nevertheless found Hockerto be distinguishable since it involved “the onetime release of Hocker Oil’s finished product, gasoline, into the ground.”  By contrast, the underlying suits filed against Doe Run alleged negligent and careless releases of lead, cadmium and other toxic materials into the environment over a number of years.  The court found this to be a critical distinction:

That is, unlike Hocker's isolated accident, the [underlying lawsuits] allege the continual and systematic release of pollutants into the environment. Moreover, despite Doe Run's pleas to the contrary, the products involved here are not finished products. Even if some of these raw materials are marketable (as Doe Run claims), their continued release of these contaminants into the community constitutes pollution. In sum, "the Court believes that contamination caused by a gasoline leak resulting from a failed plug is quite different from contamination resulting from lead concentrate abandoned on a landowner's property."

The court also distinguished a Missouri trial court decision relying on Hocker in which Doe Run was a party.  That decision concluded that the pollution exclusion did not clearly apply to claims involving releases of lead, arsenic, cadmium or sulfur dioxide since the policies at issue (not issued by Lexington) did not define “pollutants” to include those materials.  The Eastern District of Missouri found the reasoning of the state trial court’s decision to be flawed, concluding that the mere fact that lead or other constituents were not included in the definitions of pollutants did not “undermine” the application of the exclusion or otherwise render its application ambiguous.

Election of Arbitration or Court Proceeding

Gordyukova v. Certas Direct Insurance Company, 2012 ONCA 563 (C.A.)

The subject of this appeal is s. 281.1(1) of the Insurance Act, which provides that an insured shall commence a court proceeding or arbitration within two years of the insurer's refusal to pay benefits.

The plaintiff was in a motor vehicle accident in 2001.  She applied for accident benefits and a dispute arose over certain medical benefits.  After mediation failed, she issued a Statement of Claim in 2002. In 2005, the insurer advised her she had exhausted her non-catastrophic limits for medical and rehabilitation benefits.  Her application for a catastrophic designation was rejected so she commenced an arbitration at FSCO in 2008.  Certas brought a motion to stay the arbitration on the grounds that the CAT dispute should be added to the court action. The arbitrator ruled the plaintiff could not proceed with both the court action and the arbitration, but could proceed with arbitration if she discontinued the court action.  The arbitrator ruled he was not ruling on the limitation issue.  The plaintiff gave notice of her intention to discontinue the court action and proceed with arbitration, and the insurer brought a motion seeking a ruling on the limitation issue.  The arbitrator ruled the plaintiff could add all of the matters pending before the Superior Court to the arbitration.

Certas appealed, arguing that the plaintiff could not re-elect the method of proceeding eight years after the court action was commenced. The matter was appealed to the Director 's Delegate then the Divisional Court.

The Court of Appeal held that the arbitration should be stayed.  Section 281.1(1) of the Insurance Act requires an election between a court action and an arbitration. It provides that a proceeding shall be brought within two years. The insured has the choice of forum, but cannot switch forums after the expiry of the limitation period.  Since the court proceeding included a claim for "continued accident benefits", it would necessarily include a determination of the CAT issue.