This is a selection from the book titled "Catastrophe Claims: Insurance Coverage for Natural and Man-Made Disasters," Section 7:1 by Dennis J. Wall (©May 2017, Thomson Reuters). This selection is reprinted with permission of Thomson Reuters. Any further reproduction without the consent of the publisher is expressly prohibited.
§ 7:1. Introduction and interpretation
Exclusions in first-party property insurance policies are a mixture of experience. Many exclusions in first-party property insurance policies have been interpreted by many courts in many cases for a long time. Others have not. A reliable treatment of these exclusions therefore requires that past judicial interpretations be presented here. The sections of this chapter will always include an analysis of previous judicial interpretations whenever judicial interpretations are available, whether those interpretations favor coverage or denial of coverage.
Exclusions in first-party property insurance policies have been changed over time to meet perceived judicial interpretations of them. In general terms, the standard exclusionary language used in many first-party property insurance policies has been changed over time, as insurance company underwriters have reworked these exclusions in order to meet and indeed, overrule for future claims, the perceived judicial interpretation of such language as applied to past and present claims.
The impact of these trends—past judicial interpretation, where available, of some exclusions, and what might be called “updated underwriting”—is obvious on potential coverage claims for damages caused by catastrophes. For everyone involved with presenting or defending catastrophe claims, understanding the very real impact of these trends has to begin with a workable understanding of settled rules of interpretation that courts have applied to insurance policy provisions including exclusions. Parenthetically, if the reader is convinced at the outset that she or he already is familiar with these rules of interpretation, you may have nothing to gain by reading this section.
Rules of interpretation control the outcome of insurance coverage cases. Which rules are followed and how they are applied often determine the outcome. The rules that follow have been applied by courts confronting the exclusions discussed in this chapter. As in other chapters authored in whole or in part by this particular author, the subject of each section is ordinarily first approached by looking at what courts have done in cases that did not present catastrophic claims or disasters, very often followed by what courts have done when confronted with questions of insurance coverage for damages caused by catastrophes.
To begin with, the vast majority of insurance policies at issue in the reported cases involving these questions of coverage have extended “all risk” property insurance coverage. “This type of contract has been said to cover every conceivable loss or damage that may happen except when occasioned by the willful or fraudulent act or acts of the insured.”1 When guiding a client or a court through the words and phrases of an all-risk policy, it is crucial to always keep in mind that it is the list of excluded causes of loss in an all-risk policy “which is used to determine the true scope of the hazard coverage.”2 Absent willful or fraudulent acts of the insured under an all-risk policy, there is coverage in basic and simple terms for “all risks,” unless a particular risk is excluded.3 It is thus the clear burden of the insurance company under an all-risk policy to establish that the loss comes within an expressly specified exclusion.4
Sun Ins. Office, Ltd. v. Clay, 133 So. 2d 735, 739 (Fla. 1961). More recently, the same proposition has been stated by a federal court in Minnesota in this fashion:
Under an all-risk policy, coverage will exist unless a cause of loss is mentioned as an excluded cause. [Citation omitted.] Recovery will be allowed for all fortuitous losses not resulting from misconduct or fraud, unless there is a specific provision expressly excluding the loss from coverage.
Sonstegard Foods Co. v. Wellington Underwriting, Inc., 2007 WL 1501278 *4 (D. Minn. May 21, 2007) (applying Minnesota law). And by the Southern District of Iowa: "All-risk policies cover all causes of loss and physical damage to the Project property unless expressly excluded." Weitz Co., LLC v. Lexington Ins. Co., 2011 WL 3706497 *2 (S.D. Iowa May 25, 2011). Also by the Northern District of Iowa: See Penford Corp. v. National Union Fire Ins. Co., 2010 WL 300838 *3 (N.D. Iowa Jan. 19, 2010). Also by the Western District of Wisconsin:
Since the Policy specifically provided coverage for “damage or “loss,” Advance Cable arguably need not demonstrate a financial “loss” to establish coverage for “damage.”
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Here, there can be no meaningful dispute that a physical alteration to the property occurred. Even assuming this alteration is merely cosmetic, as Cincinnati Insurance contends, there are still dents in the roof panels ranging from barely discernible to an inch or so in diameter. That the denting is minor does not alter the fact that it is still a tangible alteration to the roof. The Policy does not state that damage must reach some level of severity to trigger the coverage threshold. For that matter, the Policy neither provides that damage must be visible from a particular, unspecified vantage point to trigger coverage, nor that damage must shorten the life or undermine the structural integrity of the Property to trigger coverage.
Advance Cable Co., LLC v. Cincinnati Ins. Co., 2014 WL 975580 *10-*11 (W.D. Wis. March 12, 2014), motion to clarify granted in part, denied in part, 2014 WL 2808628 *6-*7 (W.D. Wis. June 20, 2014), aff'd with opinion, 788 F.3d 743 (7th Cir. 2015). Accord, Great Plains Ventures, Inc. v. Liberty Mutual Fire Ins. Co., 161 F. Supp. 3d 970, 978 (D. Kan. 2016) (“Based on a plain reading of the phrase “physical loss or damage,” the Court finds that the “Insuring Agreement” section of the Policy unambiguously provides coverage for hail dents on a metal seam roof. Here, the “Insuring Agreement” section states that Defendant will pay for risks of “physical loss or damage.” The court in Advance Cable held that this precise language provided coverage for cosmetic hail dents in an insured's metal roofs.”). But see Fabozzi v. Lexington Ins. Co., 23 F. Supp. 3d 120 (E.D.N.Y. 2014), a case in which the property insurance policy at issue presented both an “all risk” coverage under one part of the policy and a “named perils” coverage under another part of the same policy. The coverage invoked by the policyholder was a “named perils” coverage which included collapse as a covered loss and hidden decay as a covered cause of loss or a covered peril. In that case, the Court held: “The court finds that Plaintiffs bear the burden of persuasion at trial to prove that a collapse occurred and that the collapse was caused by a covered peril.” See Fabozzi v. Lexington Ins. Co., 23 F. Supp. 3d 120, 128 (E.D.N.Y. 2014).
On the gratuitous addition by some courts of a so-called “fortuitous” requirement in proving all-risk insurance coverage, sometimes with detrimental effects to otherwise potentially legitimate claims to coverage, see § 7:4, infra.
Sun Ins. Office, Ltd. v. Clay, 133 So. 2d 735, 739 (Fla. 1961)(emphasis added). Accord, Fayad v. Clarendon Nat'l Ins. Co., 899 So. 2d 1082, 1090 (Fla. 2005). E.g., Northrop Grumman Corp. v. Factory Mut. Ins. Co., 2007 WL 2385134 *6 (C.D. Cal. Aug. 16, 2007) (California substantive law), summary judgment for policyholder rev'd and appellate opinion amended, 563 F.3d 777 (9th Cir. 2009) (remanded "for a determination of whether California's efficient proximate cause doctrine mandates coverage of the damage notwithstanding our interpretation of the contractual language."); see, e.g., Liberty Ins. Underwriters, Inc. v. Westport Ins. Corp., 2006 WL 2130728 *4 (D. Colo. July 28, 2006) (applying Colorado law); Winters v. Charter Oak Fire Ins. Co., 4 F. Supp. 2d 1288, 1291 (D.N.M. 1998) (New Mexico substantive law).
“[A]n all-risk policy covers any loss that the policy does not expressly exclude.” Vision One, LLC v. Philadelphia Indem. Ins. Co., 174 Wash. 2d 501, ¶ 32 at 516, 276 P.3d 300, ¶ 32 at 307 (2012).
E.g., Ruffin Road Venture Lot IV v. Travelers Prop. Cas. Co. of Am., 2011 WL 2463291 *3 (S.D. Cal. June 20, 2011); In re Chinese Manufactured Drywall Products Liability Litigation, 759 F. Supp. 2d 822, 829-30, 2010 WL 5288032 *3 (E.D. La. 2010) (Multi-District Litigation, Louisiana substantive law); Boardwalk Condominium Ass'n v. Travelers Indem. Co. of Illinois, 2007 WL 1989656 *5 (S.D. Cal. July 3, 2007)) (“In this case, there is no dispute that the policies issued to Boardwalk were ‘all-risk’ business owners property policies, and that certain of the property covered [specifically, the third floor units of Building 8840] sustained physical loss or damage. Travelers bears the burden of showing that one or more policy exclusions apply to prevent coverage.”); Superior Aluminum Alloys, LLC v. United States Fire Ins. Co., 2007 WL 1850838 *9 (N.D. Ind. June 25, 2007) (Indiana substantive law), app. dismissed per online docket (7th Cir. 2007); Winters v. Charter Oak Fire Ins. Co., 4 F. Supp. 2d 1288, 1291 (D.N.M. 1998) (New Mexico substantive law);see, e.g., Friedberg v. Chubb & Son, Inc., 691 F.3d 948, 951 (8th Cir. 2012) (Minnesota substantive law); Bishop v. Alfa Mut. Ins. Co., 796 F. Supp. 2d 814, 820 (S.D. Miss. 2011); Gerawan Farming Partners, Inc. v. Westchester Surplus Lines Ins. Co., 2008 WL 80711 *13 (E.D. Cal. 2008); Powell v. Liberty Mut. Fire Ins. Co., 127 Nev. 14, 252 P.3d 668 (2011) (page numbers not available at time of publication, see unnumbered two paragraphs immediately following Court's heading, "If an insurance company wishes to deny coverage under an exclusion in the insurance policy, it must show that the exclusion clearly applies to the damage").