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Insurance Law Report: June 2015

June 17, 2015

Insurance Law Report focuses on developments in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.

Below are the articles for the June issue. To view, click on the appropriate title and you will be brought to the full version of the article below.

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Louisiana Supreme Court Expands Statutory Bad Faith Standards

The Louisiana Supreme Court created a new species of bad faith conduct for which insurers can be in bad faith for failing to settle when there was never a firm settlement offer. Kelly v. State Farm Ins. Co., 2015 WL 2082540 (La. May 5, 2015).

A driver was involved in an auto accident that injured another driver. The injured driver’s attorney sent the at-fault driver’s insurer a letter stating that he would recommend a release of the at-fault driver for payment of policy limits. The insurer did not respond, nor did it advise its insured of the proposal. It later offered policy limits, which offer was rejected. After that offer was rejected, the insurer warned the at-fault driver, its insured, of an excess verdict potential and recommended that he retain personal counsel. The letter did not mention the earlier letter from the injured driver’s counsel. Suit was filed and the plaintiff was awarded well in excess of policy limits.

The at-fault driver’s insurer paid its policy limits and the insured assigned its rights against his insurer to the plaintiff, who then brought a bad faith suit against the insurer contending a failure to settle prior to suit. The district court granted summary judgment to the insurer on the basis of no offer having been made. The plaintiff appealed, and the U.S. Fifth Circuit Court of Appeals certified the following questions to the Louisiana Supreme Court:

  1. Can an insurer be found liable for a bad faith failure to settle a claim under LA. R.S. §22:1973(A) when the insurer never received a firm settlement offer; and
  2. Can an insurer be found liable under La. R.S. §22:1973(B)(1) for misrepresenting or failing to disclose facts that are not related to the insurance policy’s coverage?

The Louisiana Supreme Court answered both in the affirmative. The Supreme Court held that an insurer’s duty is an affirmative one which equated to “taking positive action(s) to comply with a legal standard” and that its obligation “is triggered by knowledge of a particular situation” which an insurer has an obligation “to gather in the claims process.” The Supreme Court further concluded that the statutory prohibition against misrepresenting facts or insurance policy provisions relating to any coverages at issue (La. R.S. §22:1973(B)(1)) is not limited to a policy’s coverage positions and can extend to any fact.
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Texas Supreme Court Refuses Ordinance Or Law Coverage

The Texas Supreme Court recently refused to reinstate an award for physical loss in favor of an apartment complex. The issue on appeal was whether the cost to comply with a municipal ordinance requiring rebuilding a structure to code was covered by either an ordinance or law endorsement or an increased cost of construction endorsement in the complex’s property policy. The court concluded that it was not because of the policy’s anti-concurrent causation clause. Jaw the Pointe, LLC v. Lexington Ins. Co., 2015 WL 1870054 (Tex. April 24, 2015).

An apartment complex was insured along with other complexes under one policy. The complex sustained damage from wind and water from a hurricane, and the insurer paid the estimated cost of damage to the structure. A municipal ordinance required that if a structure were damaged more than 50% of its fair market value, it needed to be rebuilt to code, which in this instance meant demolishing the complex and rebuilding it at base flood elevation. The complex made a claim for this additional cost, but by that time, the insurer had exhausted its policy limits with payments for damage to other complexes. The complex owner sued the insurer, and a jury found in favor of the insured for Insurance Code violations and bad faith for the delay in payment. The insurer appealed.

The insurer argued that the policy did not cover the cost of complying with the ordinance under either endorsement because the damage was caused by both wind and water, and the policy had a water damage exclusion that contained anti-concurrent causation language even if the endorsements did not. The appellate court agreed and vacated the judgment. The insured appealed, and the Texas Supreme Court accepted review.

The insured argued that the wind damage alone was estimated at more than 50% of fair market value and that the insurer knew this. Therefore, the insured argued, the additional coverages still applied. The Supreme Court disagreed, noting that the insured’s permit application did not limit its estimated amount of damage to just the wind damage and the issuance of the permit requiring enforcement of the ordinance did not specify that it was because of wind or water damage. The Supreme Court added that a theoretical possibility that the ordinance could have been enforced on the basis of solely a covered peril was irrelevant because there was no evidence that the ordinance was being enforced on any basis other than the combination of wind and water damage, coverage for which in conjunction with any other cause was excluded.
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Virginia Supreme Court Holds No Business Auto Coverage Commuting To Work

The Virginia Supreme Court recently held a law partner was not entitled to business auto coverage under his law partnership’s policy following an auto accident that occurred on the partner’s commute to work. Bartolomucci v. Fed. Ins. Co., 771 S.E.2d 451 (Va. 2015).

Following an auto accident between a partner in the insured firm and a third party during the partner’s commute to work, the third party sued the partner. The third party refused to settle his suit within the limit of the partner’s personal auto policy and the partner sought a judicial declaration that he was entitled to coverage under the partnership’s business auto policy. The court entered judgment in favor of the insurer, holding that the business auto policy did not cover the partner’s use of the vehicle at the time of the collision, and the partner appealed.

Affirming, the Virginia Supreme Court held that the partner’s commute to work was not a “use in” the partnership’s business or personal affairs, as would be necessary for the business auto policy to be triggered. The Supreme Court rejected the partner’s argument that he was “in” the partnership’s business at the time of the accident simply because he had his work cell phone on and was thinking about work during his commute. The Supreme Court found that the facts did not amount to anything more than a typical commute from home to work, noting (in particular) that the record did not indicate whether the partner actually read or responded to any work emails or billed any time during his commute.
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Texas Supreme Court To Review Loss Of Use Damages

The Texas Supreme Court recently agreed to review a decision by a court of appeals overturning a jury award compensating a towing company for business losses when its only tow truck was destroyed in an accident. The primary issue is whether loss of use damages are recoverable in total loss cases. J&D Towing LLC v. American Alternative Ins. Corp., Case No. 14-0574 (Tex. App.—Waco May 1, 2015).

The insured’s only tow truck was rendered a total loss in an accident caused by an underinsured driver. After settling with the underinsured driver for the limits of her policy, the insured filed a claim under its underinsured motorist policy for the balance of its property damage and for loss of use damages. The insurer denied the claim contending that Texas law does not require an insurer to pay loss of use damages when a vehicle is a total loss. The insured then sued its insurer, arguing that it could not replace the tow truck with what it received from the underinsured driver. The district court ruled in favor of the insured; however, the court of appeals reversed, agreeing that Texas law bars recovery for consequential loss of use damage when property is damaged beyond repair. The towing company filed a petition for review, arguing that the court of appeals followed an outdated rule and that Texas appellate courts are split on the issue.
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Courts Reach Different Results In “Pill Mill” Litigation By West Virginia Attorney General

The U.S. Fourth Circuit Court of Appeals recently affirmed a lower court decision finding that an insurer had a duty to defend a drug distribution company against allegations that it illegally distributed controlled substances because the underlying complaint contained sufficient allegations of negligence to plausibly constitute an “occurrence” under South Carolina law. Liberty Mutual Fire Ins. Co. v. JM Smith Corp., 2015 WL 1089321 (4th Cir. March 13, 2015) (unpublished).

After the West Virginia attorney general sued a drug distribution company alleging that it illegally distributed controlled substances in excess of legitimate medical need across the state, its insurer sought declaratory relief that it had no duty to defend because the allegations of the underlying lawsuit could only be read as alleging knowing misconduct which could not constitute an “occurrence” as a matter of law. The trial court granted the insured’s motion for summary judgment, holding that there were sufficient allegations of negligence in the underlying complaint so as to plausibly constitute an “occurrence” under South Carolina law. The insurer appealed.

Affirming, the Fourth Circuit held that the underlying complaint contained sufficient allegations of negligence to trigger the duty to defend. The Fourth Circuit found that the underlying complaint alleged that the insured failed to implement sufficient controls and systems to identify suspicious drug orders, and that this type of failure to take reasonable care (and the resultant harm) was “the hallmark of negligence claims.” The Fourth Circuit found it was at least possible that the insured did not take sufficient care to catch suspicious activity (and therefore accidentally caused harm to prescription drug abusers), and therefore held that the insurer had a duty to defend.

A federal court in Florida, addressing the same kind of claim, held that another drug distributor’s liability insurers did not have a duty to defend or indemnify against the complaint by the State of West Virginia for injunctive relief and damages for costs incurred by the state as a result of a prescription drug abuse in West Virginia. Travelers Prop. Cas. Co. of Am. v. Anda, Inc., 2015 WL 1020873 (S.D. Fla. March 9, 2015).

The State of West Virginia sought injunctive relief and damages alleging that the distributor violated West Virginia statutes and regulations that govern controlled substances and consumer protection by distributing controlled substances without sufficient monitoring and controls. The State claimed that it incurred additional costs to hospitals, schools, courts, social service agencies, jails and prisons due to widespread drug abuse. The distributor sought defense and indemnity from its insurers, which sought a declaration that they had no duty to defend or indemnify because the claims in the underlying complaint are not claims for “bodily injury.” The distributor argued that the insurers had a duty to defend and indemnify because West Virginia’s claim was for damages on account of “bodily injury” given that its claims stem from addictions, diseases, and sickness related to West Virginia citizens’ abuse of prescription drugs.

The district court granted summary judgment to the insurers, finding that the underlying complaint makes clear that the claims asserted are for costs incurred by the State of West Virginia, which were its own economic losses and not damages for “bodily injury” because the State did not purport to assert claims on behalf of individual citizens for the physical harm sustained personally by those citizens.

Phelps Dunbar attorneys represented two of the insurers in the Florida action. For more information on this decision, please contact Larry Ingram, Raquel Ramirez-Jefferson or Jason Stearns in Phelps’ Tampa office.
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Sixth Circuit Rejects Insurer Claim Of Reverse Bad Faith

The U.S. Sixth Circuit Court of Appeals has held that, under Kentucky common law, an insurer may not maintain a reverse bad faith claim against an insured found to have submitted a fraudulent claim. State Auto Property and Cas. Ins. Co. v. Hargis, 2015 WL 2081922 (6th Cir. May 6, 2015).

An homeowner submitted a claim for fire damage to her home. The insurer paid a substantial portion of the claim before concluding that the fire had been intentionally set and filed suit to have the policy declared void. The insured counterclaimed for breach of contract and bad faith, but ultimately admitted that she intentionally set the fire. The insurer filed an amended complaint, asserting claims for insurance fraud and a common law tort claim for reverse bad faith. The trial court declared the policy void and awarded damages, but rejected the claim for reverse bad faith.

The insurer appealed the dismissal of its reverse bad faith claim, arguing that the inherent duty of good faith must flow to both parties to the contract. The appeals court acknowledged that the covenant of good faith is an obligation owed by both parties, but held that a tort claim for breach of that duty is only permitted where there is a special relationship between the parties. Surveying Kentucky law, it noted that the purpose of the Kentucky Unfair Claims Settlement Practices Act is to protect policyholders and indicates a willingness of courts to conclude that the public is in need of protection from insurers. It then considered decisions from courts in Ohio, Iowa and California which all declined to recognize the tort of reverse bad faith. The court concluded by stating that the penalties already imposed upon the policyholder (including full restitution as part of a sentence following a guilty plea in a separate criminal proceeding) were severe and that recognizing a new species of tort claim was unlikely to have additional deterrence. The district court’s judgment was affirmed.
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Eleventh Circuit Holds Failure To Distinguish Between Covered And Uncovered Damages Precludes Coverage

The U.S. Eleventh Circuit Court of Appeals has held under Alabama law that homeowners who brought a successful breach of contract action against their homebuilder, but who failed to have the jury differentiate covered and non-covered claims, are not entitled to coverage under the builder’s CGL policy. Penn. Nat. Mut. Cas. Ins. Co. v. Snider, 2015 WL 1544617 (11th Cir. April 7, 2015).

A builder was hired to build a home, but ultimately walked off the job without finishing. The homeowners completed the project, discovering in the process that some of the construction was faulty and needed repair. They sued the builder for breach of contract, breach of implied warranty, emotional distress and mental anguish, which suit the builder’s CGL insurer defended under a reservation of rights. The homeowners prevailed on all four claims and were awarded a lump sum for all counts. The insurer filed a separate action for declaratory relief, and the homeowners counter-sued to recover the judgment from the insurer. The parties filed cross-motions for summary judgment. The trial court ruled in favor of the insurer and the homeowners appealed.

The Eleventh Circuit held that the homeowners had the burden of proving that coverage existed and that they could not do so. At least a portion of the judgment was unquestionably not covered because the builder’s refusal to complete the project was an intentional act, not an “occurrence.” Because the verdict form did not differentiate the damages awarded for these claims from other potentially covered claims, the Eleventh Circuit held that the homeowners could not meet their burden of proof to establish what damages were covered. The trial court’s judgment was affirmed.
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Eleventh Circuit Affirms Policy Void Ab Initio And No Coverage To Mortgagee

The U.S. Eleventh Circuit Court of Appeals recently held that a marine insurance policy was void ab initio due to a material misrepresentation made by the insured and that a mortgagee was not entitled to coverage under the policy because the mortgagor and the named insured were not the same. AIG Centennial Ins. Co. v. O’Neill, 782 F.3d 1296 (11th Cir. 2015).

An insured submitted a claim under his marine insurance policy after determining that his sport-fishing vessel suffered from a number of structural defects rendering the vessel unseaworthy. The insurer sought a declaration that the policy was void ab initio as to the insured and the mortgagee listed on the policy. The district court found that the insured had made misrepresentations in his application for the policy regarding his prior loss history and the purchase price of the vessel which rendered the policy void ab initio. The district court also concluded that the named insured on the policy was not the mortgagor on the loan. Therefore, it held, the mortgagee had no rights under the standard mortgage clause in the policy. The insured and mortgagee appealed.

The Eleventh Circuit affirmed, finding that the policy was void as to the insured and that the policy did not cover the mortgagee. The Eleventh Circuit dismissed the insured’s argument that the misrepresentations on his application were not material and the mortgagee’s argument that it had a valid contract with the insurer. The Eleventh Circuit found that the insured’s misrepresentations regarding the purchase price of the vessel were material, rendering the policy void ab initio. The Eleventh Circuit also held that the insurer and the mortgagee never entered into an insurance contract because the named insured was an individual, whereas the mortgagee on the loan was the insured’s limited liability company.
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Fourth Circuit Rejects Insurer's Suit Seeking To Compel Other Insurer To Join In Defense

The U.S. Fourth Circuit Court of Appeals recently upheld a lower court decision that an insurer could not state a claim for relief under South Carolina law in seeking to compel another insurer to join in a mutual insured’s defense. Auto-Owners Ins. Co. v. Travelers Cas. and Sur. Co. of America, 597 Fed.Appx. 197 (4th Cir. March 18, 2015)

One of the insured’s insurers sought an order requiring another liability insurer of the insured’s to join in the defense of the insured in an underlying lawsuit. The trial court granted the other insurer’s motion for summary judgment, and the defending insurer appealed. Affirming, the Fourth Circuit noted that under South Carolina law the duty to defend is personal to each insurer and that an insurer is not entitled to contribution from another insurer absent a specific contractual right. Because the insurers were not a party to the other’s insurance contract with the insured, the Fourth Circuit affirmed.
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Arkansas Appellate Court Holds Mobile Boom Lift Not A “Motor Vehicle”

The Court of Appeals of Arkansas has held that the definition of “motor vehicle” under a homeowner’s policy is ambiguous and does not include a mobile boom lift. Farmers Ins. Exchange v. Bradford, 2015 Ark. App. 253 (Ark. App. April 22, 2015).

The insured owned a mobile boom lift for use in his business. It had four wheels and a motor and was capable of moving, but at less than 5 miles per hour. The insured was using the boom lift at his home when it tipped over and injured a third party. His insurer denied coverage for the claim by the injured party based on a “motor vehicle” exclusion in the policy and filed a declaratory judgment action against the insured. The policy defined the term “motor vehicle,” in part, as a machine “designed for movement on land.” The trial court looked to statutory and dictionary definitions of the term vehicle and concluded that the boom lift was not a “motor vehicle.” It dismissed the insurer’s complaint with prejudice, and the insurer appealed.

The appeals court appeared to agree that it was error for the trial court to have considered extrinsic definitions of the term “vehicle” when the term “motor vehicle” was defined in the policy. But it affirmed the judgment, finding that the policy definition was ambiguous. It explained that the phrase “designed for” could mean that the machine must be intended to be used as a means of conveyance. Implicit in the holding is the notion that the boom lift is not intended to be used as a means of conveyance.
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Texas Appeal Court Affirms “Your Work” Exclusion Bars Coverage For Insured's Defective Work

A Texas appeals court recently upheld a district court’s finding that an insurer had no duty to defend or indemnify a subcontractor in a suit involving alleged construction defects. Adolfo Vela d/b/a Adelco Enterprises v. Catlin Specialty Ins. Co., et al., 2015 WL 1743455 (Tex. App.—Corpus Christi April 16, 2015).

A subcontractor sued a general contractor for breach of contract, alleging he was owed money for his work as a subcontractor. The general contractor counterclaimed asserting that the subcontractor’s work was defective. The subcontractor’s insurer originally denied coverage, but later agreed to defend under a reservation of rights, which the subcontractor declined. Prior to trial, the subcontractor non-suited the general contractor and both parties agreed to divide any sums acquired in subsequent litigation against the subcontractor’s insurer. Following a bench trial, the federal court entered judgment in favor of the general contractor on its counterclaim against the subcontractor, who then sued the subcontractor’s insurer alleging that the insurer negligently failed to defend or indemnify him. The trial court granted summary judgment and rendered a take-nothing judgment against the subcontractor who appealed.

The Texas appeals court affirmed, finding that allegations of an insured’s defective work are precluded under a CGL policy’s exclusions for damages resulting from “your work” and subsidence, or sinking, of land. The court held that the subcontractor’s insurer had no duty to defend. The court further found that the insurer had no duty to indemnify because the pre-trial agreement entered into between the subcontractor and the general contractor presented a “sham of adversity” and distorted the trial process.
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Federal Court In Kentucky Holds Misrepresentation Of Agent May Bind Insurer To Coverage Beyond The Scope Of Policy Terms

A federal court in Kentucky has held that a CGL insurer may be obligated to provide coverage beyond the scope of a policy’s terms if a policyholder relies on misrepresentations of the insurer’s agent. Essex Ins. Co. v. Ricky Robinson Construction, Inc., 2015 WL 918492 (E.D. Ky. March 3, 2015).

A contractor was sued for constructing a home on an allegedly unsuitable lot on the basis of breach of contract, negligence, fraud and unjust enrichment. The contractor’s CGL insurer filed a declaratory judgment action, asserting that the claims did not arise out of an “occurrence.” The court agreed and held that, under Kentucky law, none of the claims arose out of an accident because they arose out of events that were within the control of the insured. The insured argued, however, that it purchased the policy because the agent advised that it would cover faulty workmanship and presented an affidavit attesting to this inducement. The insurer denied that any agency relationship existed. The court ruled that the insurer could be liable for injury caused by the contractor’s reliance on the misrepresentations of the agent and denied summary judgment, concluding that it needed more evidence to make a factual determination regarding the existence of an agency relationship and the alleged misrepresentations.
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Federal Court In Kentucky Holds D&O Claim Reported After Expiration Of Claims-Made Policy Not Covered

A federal court in Kentucky has held that a policyholder that failed to timely report a claim to its D&O insurer was not entitled to coverage under either of two claims-made and reported policies. C.A. Jones Management Group, LLC v. Scottsdale Indemn. Co., 2015 WL 1393261 (W.D. Ky. March 25, 2015).

The policyholder faced a series of related lawsuits arising out of alleged fraud and breach of contract. It sought coverage under two D&O policies, each of which obligated the policyholder to provide notice to the insurer no later than sixty days after the expiration of the policy. The first suit was filed during the first policy but the policyholder did not place the insurer on notice until more than sixty days after the expiration of the first policy during the period of the second policy.

The insurer denied coverage and the policyholder filed suit to enjoin the insurer from denying the claim and to force it to provide a defense. The court denied the motion for preliminary injunction, concluding that the claims were covered but likely excluded. The insurer sought reconsideration of this ruling in its favor, arguing that the court’s threshold determination that the policy provided coverage was incorrect. The court granted the motion for reconsideration.

It then held that the claims asserted in all of the lawsuits arose out of the same facts and thus constituted a single claim. The court held that this claim was made during the first policy period when the first suit was filed. However, because the insured did not report the claim until more than sixty days after the first policy expired and since the claim was made before the second policy was in force, it could not satisfy the requirements for either policy, which the court held it must do. The court departed from the rationale of the Kentucky Court of Appeals in an unpublished decision that reached a contrary result. The court noted that as an unpublished decision, it was not binding precedent and suggested that the Kentucky Supreme Court would likely reject it.
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Tender Of Policy Limits By Primary Insured Held To Be “Offer To Pay,” Cutting Of Obligation To Pay Post-Judgment Interest On Judgment Against Insured

A federal court in Mississippi granted summary judgment in favor of a primary insured against an excess insurer holding the latter responsible for post-judgment interest accrued against its insured on appeal after the primary insurer’s tender of policy limits. Firemen’s Fund Ins. Co. v. Illinois Nat. Ins. Co., 2015 WL 1198079 (S.D. Miss. March 13, 2015).

After trial against an insured and while post-trial motions were pending, the insured’s primary insurer tendered its limits to the excess insurer. The excess insurer acknowledged, but did not accept, the tender. After the judgment was affirmed on appeal, the excess insurer informed the primary insurer that the primary insurer would be responsible for interest accrued after judgment. The primary insurer paid the post-judgment interest and informed the excess insurer it would seek repayment.

The court found based on policy wording that the post-judgment interest accrued after the date on which the primary insurer tendered its policy limits should be assessed to the excess insurer. Although the tender was not an actual payment, the primary insurer’s policy specifically relieved itself of any obligation to pay post-judgment interest once it “offered to pay.”
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Federal Court In Florida Finds Insurer Has No Duty To Defend Or Indemnify Based On Total Pollution Exclusion And Impaired Property Exclusion

A federal court in Florida recently held that an insurer had no duty to defend or indemnify its insured or its insured’s assignees based on a total pollution exclusion and an impaired property exclusion in the policy. Dumbacher v. Landmark Am. Ins. Co., 2015 WL 1044125 (M.D. Fla. March 10, 2015).

An insured made a claim with its general liability insurer after it was sued for negligently installing insulating foam in the claimants’ home, which released toxic fumes that caused the claimants to suffer adverse health effects and rendered their home uninhabitable. The insurer denied coverage on the grounds that the damage did not constitute “property damage” and that coverage was barred by a total pollution exclusion, an overspray or spillage exclusion and an impaired property exclusion. The claimants obtained a judgment against the insured, and the insured assigned its rights under the policy to the claimants. The claimants filed a declaratory judgment action against the insurer alleging that the insurer was obligated to pay the judgment obtained in the underlying action. The insurer filed a motion for summary judgment.

The district court granted the motion, finding that the total pollution exclusion and impaired property exclusion barred coverage. The insureds did not dispute the insurer’s contention that these two exclusions would bar coverage for the claims asserted in the underlying action. However, they argued that the Classification Limitation Endorsement to the policy modified the policy and made the insurer’s arguments regarding the exclusions moot. The district court rejected the argument, finding that the Classification Limitation Endorsement restricts coverage otherwise provided by the policy and is not ambiguous. Because the district court found that the claimants had not provided any case law suggesting that the endorsement should be interpreted as abrogating every other exclusion in the policy once its terms are met, the court found that the total pollution exclusion and impaired property exclusion barred coverage.
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Federal Court In Texas Grants Insurer’s Summary Judgment On Water Damage Exclusion

A federal court in Texas granted summary judgment to an insurer based on a water damage exclusion that it did not owe coverage for damages resulting from the back-up of water or sewage from outside a plumbing system. Durrett v. Nationwide Property & Cas. Co., 2015 WL 1564783 (W.D. Tex. April 7, 2015).

A house had a waste water storage tank immediately adjacent to it. Inside the tank was a grinder pump and a check valve and quick-disconnect coupling inside the discharge line. The discharge line was an uphill pipe that reached to 100 feet inside the property line where there was a second check valve owned by the municipal utility district. The second check valve and the quick-disconnect coupling failed causing sewage to back up into the house until the broken check valve was replaced. The homeowners made a claim on their homeowners’ policy, but the insurer contended that the damage was excluded by the water damage exclusion except for a 5% policy limit additional coverage which it paid. The water damage exclusion excluded coverage for water or water-borne material which backs up through sewers or drains “from outside the dwelling’s plumbing system.”

The homeowners argued that the application of the exclusion turned on the location of the plumbing failure. They argued that since the dwelling’s plumbing system also failed, the exclusion did not apply. The court held that the policy only required that water or water-borne material come from outside the dwelling’s plumbing system, but that the plumbing failure could happen either inside or outside the dwelling. The court also rejected the homeowners’ argument that the loss was covered as a sudden and accidental discharge from a plumbing system which would be covered. The court stated that such a reading of the policy would effectively read the exclusion out of the policy as if it did not exist.
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Federal Court In North Carolina Dismisses First-Party Bad-Faith Claim

A federal court in North Carolina recently granted an insurer’s motion to dismiss an insured’s bad faith claim, holding that the insured’s first-party complaint failed to contain sufficient factual allegations to support such a claim. Huang v. State Farm Fire and Cas. Co., 2015 WL 1433553 (E.D. N.C. March 27, 2015)

The insureds submitted a claim to their insurer after their home was damaged during a thunderstorm. After the insurer denied part of the claim, the insured filed suit in state court, alleging, inter alia, bad faith. The insurer removed the suit to federal court, and immediately moved to dismiss the bad faith claim. Granting the insurer’s motion to dismiss, the court found that an insurer’s refusal to pay for a disputed portion of a claim did not satisfy the first element of a bad faith claim under North Carolina law: that the insurer recognized the claim as valid but refused to pay it. Further, the court found insufficient allegations of bad faith and aggravating conduct, as would be necessary to support a bad faith claim.
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