Trial Court Failed to RTFP and Improperly Refused to Apply Exclusion
Every insurance adjuster, insurance claims person, public insurance adjuster, insurance coverage lawyer and insurance policyholders’ lawyer knows that it is important to Read The Full Policy (RTFP) when interpreting a policy term, condition or exclusion. Not every judge has learned the rule to RTFP.
In Engineered Structures, Inc., a corporation of Idaho, an Idaho corporation v. Travelers Property Casualty Company Of America, a Connecticut corporation, Engineered Structures, Inc., corporation of Idaho, an Idaho corporation v. Travelers Property Casualty Company Of America, a Connecticut Corporation, No. 18-35588, No. 18-35589, United States Court Of Appeals For The Ninth Circuit (August 17, 2020) the District Court failed to RTFP and found coverage regardless of the policy exclusion and Travelers appealed.
FACTS
This cross-appeal centers on the scope of insurance coverage from a builders’ risk policy (“the Policy”) between Travelers Property Casualty Company of America (“Travelers Insurance”) and Engineered Structures, Inc. (“ESI”). The Policy covered risks of loss while ESI built a fueling station for Fred Meyer Stores, Inc., in Portland, Oregon. Damages occurred when an underground fuel storage tank “floated” in a “wet” excavation hole before the tank’s complete installation. Travelers Insurance investigated and determined that the damages resulted from ESI or its subcontractor, 3 Kings Environmental, Inc. (“3 Kings”), not placing enough ballast water into the tank to prevent floatation during a period of rainy weather. As a result Travelers denied coverage for ESI’s damages, citing an exclusion in the Policy barring coverage for “faulty, inadequate or defective . . . workmanship [or] construction” (“the Exclusion”). ESI then sued Travelers Insurance for breach of contract, negligence, breach of the implied covenant of good faith and fair dealing (bad faith), and declaratory judgment.
The district court found the Exclusion to be ambiguous based on faulty “workmanship” being susceptible to two reasonable interpretations: (1) excluding only losses caused by a flawed product; or (2) excluding losses caused by a flawed process. Because the Exclusion did not apply, the district court granted summary judgment to ESI on its breach of contract claim. However, the district court granted summary judgment to Travelers Insurance with ESI’s bad faith claim.
Travelers Insurance appealed the district court’s grant of summary judgment on the breach of contract claim, and ESI appeals the district court’s grant of summary judgment on its bad faith claim.
ANALYSIS
Construction of a contractual insurance policy provision is a question of law. Both parties agreed that Idaho law governs this diversity action.
The Exclusion states Travelers Insurance “will not pay for loss or damage caused by or resulting from faulty, inadequate or defective . . . [d]esign, specifications, workmanship, repair, construction, renovation, remodeling, grading or compaction.” (emphasis added).
The district court focused on “workmanship” to find the Exclusion ambiguous and inapplicable. But that focus disregarded the Exclusion’s unambiguous, process-oriented use of “construction.” The Policy’s section on “covered property,” for example, defines “completion of the project” as including “construction activities” like “site preparation . . . fabrication, assembly, installation, erection, alteration, [and] renovation. Similarly, in another section on coverage, the Policy instructs the insured to “see that the following are done in the event of a loss . . . Resuming, as soon as possible, all or any part of the construction or repair; . . . .”
The Ninth Circuit noted there was no difference between “construction” in the Exclusion than the Policy’s provisions on coverage—as a term referring to the “process” in completing the covered project. Courts must construe the policy as a whole, not by an isolated phrase.
Because “construction” carries an unambiguous, process-oriented meaning in the Exclusion, the Ninth Circuit concluded that remand was required because the district court merely “assume[d] insufficient ballast was in the [storage tank] at the time of the loss,” because that assumption did not affect the case’s outcome if the Exclusion were ambiguous. Further proceedings before the district court are necessary to resolve whether ESI’s losses were, in fact, “caused by or result[ed] from faulty, inadequate or defective . . . construction,” thus making the Exclusion applicable.
The Ninth Circuit left to the district court to determine whether an “excluded cause of loss” did, in fact, “result[] in a Covered Cause of Loss”; and, if so, the scope of the “resulting loss or damage.”
Travelers Insurance submitted evidence to support a reasonable dispute about insurance coverage. The burden thus shifted to ESI to show a genuine dispute of material fact about its claim for coverage not being “fairly debatable.”
While ESI presented evidence showing that Travelers Insurance knew there might be some question as to whether 3 Kings properly ballasted the tank, its evidence was not enough to show more than the existence of a legitimate question or difference of opinion over the eligibility, amount or value of the claim. ESI needed to present some evidence of a clear entitlement to coverage, which it did not do.
Moreover, even if the district court on remand finds that coverage exists for ESI’s losses, that does not mean Travelers Insurance acted in bad faith by denying ESI’s claim and litigating the Policy’s scope in these circumstances.
ZALMA OPINION
The Ninth Circuit did not resolve all of the issues between the parties. It did find that the trial court, by failing to read the full policy, found an ambiguity in the exclusion that did not exist. It is an important decision because it reminds the courts and litigants that it is important to RTFP before making a decision with regard to insurance coverage. Because the Ninth Circuit read the full policy it concluded that there was no ambiguity in the exclusion and evidence was necessary to establish the existence or non-existence of coverage for the floating tank.
© 2020 – Barry Zalma
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 52 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 52 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.
Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts
Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/
Subscribe to e-mail Version of ZIFL, it’s Free! –
Read last two issues of ZIFL here. https://zalma.com/zalmas-insurance-fraud-letter-2/
Go to the Barry Zalma, Inc. web site here https://www.zalma.com/
Listen to my podcast, Zalma on Insurance, at:
https://podcasts.google.com/?q=zalma%20on%20insuranceZalma on Insurance –