May 24, 2018

Colorado Court of Appeals: Plaintiff Not Allowed to Treat Denial of Liability as Denial of Coverage

The Colorado Court of Appeals issued its opinion in Pena v. American Family Mutual Insurance Co. on Thursday, April 19, 2018.

Uninsured Motorist—Denial of Liability—Denial of Coverage—CRCP 12(b)(5) Dismissal.

Peña was involved in a three-car collision. Both Peña and Garner, another driver involved in the accident, were insured by defendant American Family Mutual Insurance Company (American Family). Peña sent a letter to American Family asserting a claim under the uninsured motorist provisions of her policy. American Family denied Peña’s claim, asserting that Garner was not responsible for the damage to her vehicle and Garner had coverage at the time of the accident, so Peña’s uninsured motorist property damage (UMPD) provision would not apply.

Peña sued Garner and American Family in separate actions. In this action, she sued American Family under C.R.S. § 10-3-1115 for the unreasonable delay and denial of benefits due under the UMPD provisions of her policy. American Family moved to dismiss, arguing that Peña’s complaint failed, as a matter of law, to state a claim upon which relieve could be granted because Peña’s UMPD coverage applied only if American Family, as Garner’s insurer, denied coverage, rather than liability, for Garner in connection with the accident. The district court agreed with this interpretation of Peña’s policy and the distinction made between denial of coverage and denial of liability. But because American Family had only denied liability and the issue of liability had not yet been determined, the court concluded that Peña’s UMPD coverage did not apply at that point and the lawsuit was premature. The district court dismissed the case without prejudice.

On appeal, Peña contended that the district court erred in dismissing her case. She argued that the district court erred in not considering whether American Family unreasonably delayed or denied her claim before dismissing her action. Because American Family denied liability but not coverage, her policy’s UMPD provision was inapplicable, and there were no benefits that could have been delayed or denied. Peña had no claim as a matter of law. The district court’s determination that Peña’s lawsuit was premature was in error because Peña will never have a claim against American Family under her policy for unpaid UMPD benefits from the accident; Garner’s insurer has not denied coverage, which is the circumstance that would trigger Peña’s UMPD coverage. If Garner is ultimately found liable, Peña will have a claim against American Family under the liability provisions of his policy.

The judgment was affirmed.

Summary provided courtesy of Colorado Lawyer.

Tenth Circuit: Concurrent Insurer Responsible for Proportional Shares of Loss for School Fire

The Tenth Circuit Court of Appeals issued its opinion in Philadelphia Indemnity Ins. Co. v. Lexington Ins. Co. on January 19, 2017.

In 2012, Philadelphia Indemnity Insurance Company issued an insurance policy to Tulsa School of Arts and Sciences (TSAS), an Oklahoma charter school. TSAS leased the Barnard Elementary School building from the Independent School District No. 1 of Tulsa County, Oklahoma. TSAS obtained the insurance policy, as required by the lease, naming the District as the payee. The District held a separate insurance policy on the building leased by TSAS and on over 100 other facilities the District owned. The building was damaged by fire on September 5, 2012. The total adjusted loss was $6,014,359.06. The insureds were paid; however, the insurers pursued litigation over which policy covered the damage. Both policies protected against fire damage and included identically worded “other insurance” provisions. Philadelphia sought a declaratory judgment in the U.S. District Court for the Northern District of Oklahoma in March 2013. The district court granted Philadelphia’s motion in December 2015 and denied Lexington’s request for summary judgment.

Rejecting Lexington’s arguments, the Tenth Circuit found that Philadelphia had standing. The court held that Philadelphia met the Constitutional requirement for a case or controversy in the context of a declaratory judgment. Philadelphia’s alleged injury was financial, definite, and concrete. The parties’ interests were adverse: either insurer would bear the loss or share it. Due to the causal connection of how the insurers’ policies interact with one another, a judicial determination of the insurers’ responsibilities under the policies would provide redress. The court stated that this action is between insurers for a declaration of the insurers’ responsibilities, and not an action to enforce a contract. Therefore, Philadelphia had standing.

The Tenth Circuit agreed with the district court’s conclusion. The court held that the district court properly applied Oklahoma insurance law in its decision on summary judgment. The panel applied the framework established by the Oklahoma Supreme Court in Equity Mutual Insurance v. Spring Valley Wholesale Nursery to affirm that both policies were primary polices, the identical policy provisions canceled each other out, and the total loss must be shared proportionally. This reasoning was further supported by the Fifth Circuit’s decision in Southern Insurance Co. v. Affiliated FM Insurance Co. In Southern Insurance, the court applied Mississippi law to hold that concurrent policies containing “other insurance” clauses canceled each other out and required pro rata calculation.

Philadelphia argued that the district court should have required Lexington to pay more because Lexington’s policy limit was $100 million, while its policy limit was $7 million. The court disagreed. Because Lexington’s policy included a “limit of liability” endorsement, Lexington’s policy limit was the amount of loss here and not the full $100 million.

Judge McHugh concurred in part and dissented in part. He agreed with Philadelphia. The district court should have used Lexington’s policy limit of $100 million and not the liability limit to determine the proportional share. The dissenting part also relies on a different interpretation of the default rule from Equity Mutual. Without expressly provided for in the insurance policy, the pro rata calculation should be based on the total policy limit of each policy. This conclusion would result in Philadelphia liable for 6.54% and Lexington 93.46%. The majority of the panel affirmed the lower court’s calculation apportioning 53.79% of the loss to Philadelphia, and 46.21% to Lexington.

Colorado Court of Appeals: Hail in Window Wells Retained Character as Surface Water for Insurance Purposes

The Colorado Court of Appeals issued its opinion in Martinez v. American Family Mutual Insurance Co. on Thursday, February 9, 2017.

Michael Martinez owned a home in Erie, Colorado. On August 3, 2013, a heavy rain and hail storm caused hail to collect in the window wells for his basement windows, and eventually the rain and hail overflowed into his basement windows, causing extensive damage. Martinez filed a claim with American Family, but the insurance company denied his claim after investigation, finding that the damage was caused by “flooding” or “surface water,” both of which were excluded under the insurance policy.

Martinez filed suit, seeking a declaratory judgment on the issue of coverage and asserting claims for contractual and extra-contractual damages. American Family moved for summary judgment on the issue of coverage, arguing that the insurance policy’s water damage exclusions for “flood” and “surface water” applied as a matter of law. The district court granted American Family’s motion, and Martinez appealed.

On appeal, Martinez raised two contentions: (1) the damage to his basement was not caused by “surface water” because the water that collected on his roof and melted hail did not fit the definition of surface water; and (2) even if the water was surface water, it lost that characteristic when it entered his window wells. The court of appeals disagreed on both counts. The court of appeals first evaluated the Colorado Supreme Court opinion in Heller v. Fire Insurance Exchange, 800 P.2d 1006 (Colo. 1990). The court found that the supreme court’s definition of surface water in Heller fit squarely with the issues raised by Martinez, although the facts in Heller differed significantly from those alleged by Martinez.

The court of appeals determined that the water on Martinez’s roof was unquestionably surface water, noting that dwellings were reasonably considered extensions of the earth’s surface. Likewise, melted hail was well within the definition of surface water. The court next evaluated Martinez’s claim that the water in his window wells lost its characteristic as surface water, and disagreed. The window wells were designed to retain the surrounding soil and allow water to drain, therefore they were reasonably considered extensions of the surface and did not transform the collected water into a different type of body of water.

The court of appeals affirmed the trial court’s entry of summary judgment in favor of American Family.

Colorado Court of Appeals: Colorado Governmental Immunity Act Does Not Apply Retroactively

The Colorado Court of Appeals issued its opinion in Smokebrush Foundation v. City of Colorado Springs on Thursday, June 18, 2015.

Colorado Governmental Immunity Act—Gas Facility Exception—Public Building Exception.

The Smokebrush Foundation (Smokebrush) alleged that various contaminants had migrated from the City of Colorado Spring’s (City) property onto its property, causing damages. The district court denied the City’s motion to dismiss, concluding that the City’s immunity was waived under two statutory provisions of the Colorado Governmental Immunity Act (CGIA): the gas facility exception and the public building exception. The district court also concluded that these waiver provisions applied retroactively to contamination that undisputedly occurred before the CGIA was enacted.

On appeal, the City argued that the trial court erred in finding that the CGIA applied retroactively. Nothing in the CGIA states that it is intended to operate retroactively. Therefore, the CGIA operates prospectively, effective July 1, 1972. Accordingly, to the extent that Smokebrush’s allegations were based on contamination stemming from the City’s coal gas operations in the 1920s and 1930s, the district court erred in concluding that the gas facility or public building exceptions to governmental immunity applied retroactively. The City is therefore immune from tort claims based on such contamination.

The City argued that the district court erred in concluding that the City was subject to suit under the gas facility and public building exceptions to governmental immunity for the injuries claimed by Smokebrush from alleged asbestos migration during the demolition activities on the property beginning in late 2012. The legislature waived governmental immunity for injuries resulting from “[t]he operation and maintenance of any public water facility, gas facility, sanitation facility, electrical facility, power facility, or swimming facility by such public entity.” Because the City’s property was not used in the collection, production, or distribution of natural gas and only housed administrative functions after the 1930s, the gas facility exception did not apply. Governmental immunity is also waived for injuries resulting from a dangerous condition of a public building. Although the City acknowledged that the property was a public building, this exception only applies to “constructing” and “maintaining” a public building. When the asbestos allegedly migrated to Smokebrush’s property, the property was in the process of being completely demolished. The dangerous condition definition applicable to the public building exception does not expressly recognize negligence claims stemming from demolition of a public facility. Therefore, the public building exception did not apply. The order denying the City’s motion to dismiss was reversed and the case was remanded to the district court with instructions to grant the motion.

Summary and full case available here, courtesy of The Colorado Lawyer.

Tenth Circuit: Insurance Exclusion for Intentional Acts Must Include Intent to Harm

The Tenth Circuit Court of Appeals issued its opinion in Mid-Continent Casualty Co. v. Circle S Feed Store, LLC on Tuesday, June 17, 2014.

I&W, Inc. owned a solution mining operation in Carlsbad, NM, and was insured by Mid-Continent Casualty Co, who provided CGL and umbrella policies to I&W. Solution mining is a process where fresh water is injected into underground salt formations, which creates brine water. The brine water is then extracted and sold for use in the oil and gas industries, creating an underground cavern. I&W’s mining operations created a cavern so dangerously large that they infringed upon the subsurface property of neighboring Circle S Feed Store and caused damage to the surface property. Circle S filed suit against I&W in state court, where it prevailed and was awarded $703,000 in compensatory damages and $300,000 in punitive damages. I&W subsequently declared bankruptcy.

During the pendency of the state court action, Mid-Continent sought a declaratory judgment in federal court that it owed I&W no duty of indemnification under the insurance policies. Both Mid-Continent and Circle S filed motions for summary judgment. The district court determined that (1) the damages were caused by an “occurrence” within the meaning of the policy; (2) the policy’s “intentional injury” exclusion did not apply; (3) the state court did not award judgment for diminution in value; and (4) nonetheless, indemnification was precluded by an exclusion in one of the umbrella policies for subsurface mining operations. The district court granted summary judgment for Mid-Continent based on the fourth point.

Circle S filed a motion to alter or amend the final judgment, arguing that the district court erred in holding the exclusion applied to the primary insurance policies and seeking clarification. The district court declined to revise its opinion but declared that it would have found coverage but for the exclusion. Circle S then appealed to the Tenth Circuit.

The Tenth Circuit examined the language of the policies and exclusions and determined that the district court had erroneously broadened the scope of the exclusion. The exclusion unambiguously applied to the umbrella policies but it was error to also apply it to the primary policies, since umbrella policies are separate and distinct from primary policies and serve different purposes. The Tenth Circuit then turned its focus to the district court’s resolution of the remaining issues. The district court had stated that but for the exclusion it would have found coverage based on three criteria: “(1) the subsidence I&W caused was an ‘occurrence’ within the
meaning of the policies; (2) the policies’ ‘intentional injury’ exclusion did not apply to exclude coverage; and (3) the damages awarded to Circle S were for a ‘physical injury to tangible property,’ which is covered, rather than for pure diminution in value, which is not.” The Tenth Circuit examined each prong.

Although Mid-Continent argued that the subsurface mining operations were not an “occurrence” under the policy language because I&W knew that its mining operations would create a cavern, the Tenth Circuit disagreed, noting that I&W did not know that the underground cavern had grown dangerously large or was infringing on the neighboring property. This also disposed of the “intentional injury” question, as I&W did not intend to create a dangerous cavern. Finally, the Tenth Circuit assessed whether the awarded damages were for physical injury to tangible property or pure diminution in value, and determined that the diminution in value suffered by Circle S was caused by the tangible injury of the subsurface cavern.

The district court’s judgment was affirmed regarding the application of the exclusion to the umbrella policies, but reversed as to the primary policies and remanded for further proceedings consistent with the Tenth Circuit’s holding.