No Coverage for Tearing Down Barn Apartment that Violated Building Code

The South Carolina Court of Appeals recently held that a general liability policy excluded coverage for the homeowners’ claim that they lost the use of property when they had to remove an apartment built on top of a barn because it violated zoning ordinances. William and Frances Walde, as Assignees of Johnson Construction Co. of Aiken, Inc. v. Assoc’n Insurance Co., (S.C. Ct. App. Op. No. 5061, Dec. 2012).

Post by Insurance Chair Pete Dworjanyn

The Waldes, (homeowners) wanted to build a barn with an upstairs apartment on their property in Aiken.  They hired Johnson Construction to obtain the necessary variances from city building ordinances.  The homeowners then contracted with Johnson to construct the barn and apartment.  Eighty percent of the work had been completed when the building inspector notified Johnson that the barn did not comply with the variance or the special exception.  The city ultimately allowed the barn to remain if the apartment was removed to lower the barn’s roof.

The homeowners filed an arbitration claim against Johnson, who tendered it to his insurer, Association Insurance Company (AIC).  AIC denied coverage.  Johnson and the homeowners settled their dispute prior to arbitration.  The settlement included an assignment to the homeowners of Johnson’s rights against AIC.  The homeowners filed suit against AIC, alleging breach of duty to defend and indemnify.  The trial court granted the homeowners’ motion for partial summary judgment, holding AIC was obligated to defend Johnson, that the policy provided coverage, and that AIC was liable for fees and costs.

Property Damage – The homeowners claimed they suffered “physical injury” to property when the barn was partially demolished.  The Court of Appeals rejected that argument holding that although “physical injury” was not defined by the policy, injury is generally considered the violation of another’s legal right. Using this definition, the court ruled that the partial tearing down of the barn’s second story did not constitute an injury because the removal was a remedial measure to fix the injury caused to the homeowners when the construction put them in violation of the City’s ordinances. However, the court also held the homeowners’ allegations raised the possibility of loss of use of tangible property that had not been physically injured, because the homeowners could not fully use the property after they were informed of the barn’s noncompliance.  The court rejected AIC’s argument that the homeowners failed to allege property damage because the physical injury to the barn resulted from faulty or defective workmanship, as faulty workmanship was only relevant to the policy’s exclusions, not the definition of property damage.

Occurrence – The court next concluded the homeowners’ allegations in the arbitration demand established the possibility of an occurrence. The demand claimed that Johnson’s advice was “wrongful”.  AIC argued the use of “wrongful” meant the claims were not based on an accident that would give rise to an occurrence. The court rejected the argument, holding the allegation that Johnson “wrongly” said its plans complied with the variance and exception could be construed as alleging Johnson was mistaken or acting without due care. The opinion noted that the court must look beyond the labels describing the acts and allegation and look to the acts themselves which formed the basis of the complaint.   

Accordingly, regardless of whether the claim was for negligence, negligent misrepresentation, or breach of fiduciary duty, the allegation of erroneous representations and provision of information was unintentional, and therefore, potential acts within the terms of the policy.

Exclusion – The court concluded, however, the “your work” exclusion applied and excluded coverage.  That exclusion excludes coverage for property damage to that particular part of any property that must be restored, repaired, or replaced because the party’s work was incorrectly performed on it.  The exception to that part of the Damage to Property exclusion provides the section does not apply to property damage included in the products-completed operation hazard.  The court agreed with AIC that the homeowners’ alleged property damage was not included in the products-completed operations hazard coverage.  Regardless of whether the contract was complete (or terminated) when the homeowners lost the use of the property, the policy deems all loss of use unaccompanied by physical injury to have occurred at the time of the occurrence. 

The homeowners claimed the loss of use of property arose out of Johnson incorrectly advising them and obtaining the necessary approval from the City.  Therefore, the loss of use was deemed to have happened at the time of those incorrect performances, and before Johnson’s work was complete.  The homeowners alleged the loss of use of the barn while they were required to tear down and build a new roof; they alleged property damage to that particular part of property that must be replaced because Johnson’s permit work was incorrectly performed.

The court rejected the homeowners’ argument that their claims were not excluded because the defective work occurred before the zoning authority rather than the construction of the barn.  The argument that their claims involved a permitting defect, not a construction defect, did not allow it to escape the damage to property exclusion.

S.C. Supreme Court Holds Damages Arising Out of Title Insurance Suit Are to Be Measured From the Date of the Property’s Purchase

Post by Pete Dworjanyn

On September 12, 2012, the South Carolina Supreme Court, on certification from the U.S. District Court for the District of South Carolina, held the insured’s damages arising out of a title insurance suit should be measured as of the date of the insured’s purchase of the property.

In Whitlock v. Stewart Title Guarantee Company[l1] , the plaintiff purchased a lot on the Intracoastal Waterway on October 30, 2006, for $410,000. A title search failed to disclose a spoilage easement which allowed the Army Corp of Engineers to dredge and maintain the Intracoastal Waterway and placed dredged material on the plaintiff’s lot at any time. In January 2012, the plaintiff sought a building permit to construct a home on the property. The building permit was rejected as a result of the spoilage easement. At issue was the date on which Plaintiff’s damages should be measured. The parties did not dispute that the value of the property had decreased as a result of the downturn in the real estate market, in addition to the diminution in value cost by the title defect.

Certain title insurance contracts unambiguously identify a date for measuring the diminution in value of the property, or otherwise allow for the method of valuation. The title insurance policy at issue, however, merely referred to “actual loss.” A title insurer is generally liable for losses or damages caused by defects in the property’s title. Defects for which title insurance policies provide coverage are generally defined as liens and encumbrances that result in the loss in the title’s value. The terms of the policies can control a method of valuation, but the purpose is to place the insured in the position he thought he occupied when the policy was issued. Generally, the measure of damages should compare the encumbered value with the value of the land without any encumbrances. Courts around the country have generally identified three points in time to measure an owner’s actual loss: the date the property was purchased, the date the title defect was created, and the date the defect was first discovered.

The plaintiff argued her damages, as measured by the diminution in property value, should be measured as of the date the property was purchased. The defendant insurer argued the value of any loss should be measured as of the date of the discovery of the title defect, asserting that under a title policy the risk of a decline in the land’s market value because of market conditions should be assumed by the purchaser, and the risk of the land’s market value being impacted by a title matter should be assumed by the title insurance company. Having considered the parties’ arguments, the court held, “We conceptually agree with Defendant, but we are construing a contract of insurance, not attempting to fashion an equitable remedy. The insurance policy here simply fails to identify the valuation date as the date of discovery of the title defect or otherwise provide clear language that would require a valuation date in line with Defendant’s position.” Recognizing the apparent inequity in the answer to the certified question, the court noted the resolution of the question was not a matter of equity, but a matter of construing an insurance policy, and concluded the date the property was purchased was the proper valuation date.

Justice Pleicones dissented, indicating that, in his opinion, an insured suffers no actual loss until the defect is discovered: “Until that juncture, the insured’s loss is unrealized. Since only a loss that is actualized as insured, I would find that the date of discovery of the title defect is the proper date upon which to measure the diminution in the property’s value.”

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 [l1]http://sccourts.org/opinions/HTMLFiles/SC/27169.pdf

The "Not Covered" of Property Insurance

Here are the events usually not covered by property insurance:



-Flood

-Earthquake

-Intentional Damage By You

-Animals and Insects



Your agent can help you with the first two.



Don't do the third.



Frequent inspections for the last.

Repeat After Me, Coinsurance Is Bad!

For the 432,234th time now, I have had an agent send me a proposal of insurance that includes coinsurance.



Insurance buyers, ask your agent if you have coinsurance on your property insurance policy. If the answer is yes, ask your agent why they have allowed your insurance company to include a penalty that might hit you when you have a loss.



For the insurance buyer, a coinsurance penalty is ALWAYS bad. It means that there is a chance that a partial loss might not be covered like you think it will be.



If you are interested in knowing how coinsurance works and how the penalty hits you, send me an email (or use the search bar to the right).



Frankly, all you need to know is that coinsurance is a penalty - penalties are never a good thing. Your agent is supposed to be helping you avoid bad things, and if you have coinsurance, YOUR AGENT IS NOT DOING HIS OR HER JOB!!!!



(Note to Insurance Geeks: Please do not send me emails lecturing me on the benefits of coinsurance. Do not tell me that it is a rating necessity that really benefits insurance buyers. Insurance buyers should buy the right amount of insurance - if they do that there should never be a coinsurance penalty. No individual insurance buyer has ever been better off at the time of a loss by having a coinsurance clause in his policy.)

Insurance Matters: Property Insurance Issues Part 2

My February column for CU Management...



More property insurance issues for credit unions - See the column here.



Flood insurance

Earthquake coverage

Computers

Ordinance or Law Coverage

Sometimes I wake up at night thinking about articles for this blog. I'm surprised that this subject has not been included here yet!



After a loss to your building you may find that local laws and building ordinances increase the cost of reconstruction. Perhaps you will have to add a sprinkler system or add handicap access.



Ordinance or law coverage provides additional insurance to pay for the higher cost of reconstruction due to building codes, laws, or regulations.



The coverage actually has three parts:



Coverage A - Loss to the Undamaged Portion of the Building: Coverage is provided for the value of that part of the building that is undamaged but that must be demolished by order of a governmental authority due to a building code.



Coverage B - Demolition Cost to the Undamaged Portion of the Building: Pays the cost of demolishing and removing the undamaged portion of the building.



Coverage C - Increased Cost of Construction: Pays the increased cost of construction due to law or building codes.



Check with your insurance agent to see what limits you have for this coverage. If your building is over ten years old I would be surprised if there are not at least some building codes you would be affected by.

Insurance Matters: Property Insurance Issues Part 1

My January column for CU Management:



You’d think that the coverage on your credit union’s buildings and business property would be pretty straightforward. It’s a place I see plenty of problems, though.



This and the next few installments of this column will focus on credit union property insurance, where I’ll pose the issues as questions you can put to your agent.



Do we have replacement cost coverage?



There are two ways most insurance policies value property:



1) Replacement cost is the cost to buy the lost item new. It’s the cost to rebuild the building with current cost of materials and the current cost of labor. It’s the cost to buy a new computer that is stolen.



2) Actual cash value is usually defined as replacement cost minus depreciation. It also can be thought of as the market value of an item. ACV is always less than replacement cost.



Whole Article Here

Earthquake Excluded & Other Stuff Is Too

Almost all property insurance policies exclude earthquake. Coverage is available almost everywhere in the US - either through standard or specialty insurers.



What is not commonly discussed is that the earthquake exclusion is broader than just earthquakes.



The following are excluded in the same breath:



landslide,

mudflow,

sinkhole,

mine subsidence

land shock waves before, during or after a volcanic eruption,

and any other earth movement including shifting, rising, or sinking.



These exclusions are in commercial policies and in personal insurance policies.



Class dismissed.

Bedbugs and Property Insurance

For some reason bedbugs are in the news now.  Apparently there is an epidemic of infestations.  (Perhaps there is just an epidemic of reporting of infestations - who am I to say?)



If your place is plagued by pests, how does insurance respond?



Short answer?  It doesn't.



The standard home insurance policy excludes loss caused by insects.  That means that the damage caused by insects is not covered and the cost of extermination is not covered.



The standard commercial property form includes a similar exclusion.  Damage repair?  Not covered.  Extermination? Not covered.  Loss of income because of insects?  Not covered.



I understand a few insurers are considering providing coverage to restaurants and hotels.  I have yet to see a policy, though.

Moving To A New Location

A client just sent out a mass email with the details of an upcoming move of their central office.  I reminded them of some insurance issues in such a change.



First, there is the insurance on your stuff being moved from one location to the other.  Movers usually only provide coverage of xx cents per pound and are almost always only responsible for damage caused by their negligence.  Theft, lightning strikes, and an accident caused by another probably will not be reimbursed by the mover.



Look to your own insurance to cover your stuff while in transit.  Call your agent and tell them you need to be sure your property is covered during the move.



Second, you need to add the new location to your property, liability, and workers' compensation insurance. Again, your agent can help with these endorsements.

Inherent Vice

Inherent vice is an object's tendency to deteriorate.



Ray Burnham, in his most excellent, Burnham's Insurance Dictionary, uses examples of meat putrefying, iron rusting, and people aging.



Property insurance almost always excludes inherent vice, though most policy forms do not use the term.



The ISO property form excludes inherent vice with the following words:



"Rust or other corrosion, decay, deterioration,

hidden or latent defect or any

quality in property that causes it to damage

or destroy itself;"



Class dismissed.

Earthquake Insurance

1) Earthquake is not covered by standard property insurance policies.



2) Earthquake insurance is available in every county in the US (its just more expensive in some places).



3) Earthquake is the single most uninsured catastrophic exposure for most businesses.



4) I don't understand why all businesses do not buy earthquake insurance.

Lightning Damage and Your Insurance

Data accumulated by the Insurance Information Institute reveals that there were 185,789 home insurance lightning claims in 2009.



These claims include damage to homes, contents, and electronics.



The total cost of the claims was $798 million.  In 2008 lighting damage topped $1 billion.



Surge protectors (at individual outlets or on your power panel) and lightning rods can prevent a great deal of the damage caused by lightning.



Of course, lightning and the fires that can come after are covered by property insurance - both personal and commercial insurance.



A power surge from a lightning strike away from your premises is another matter - it's often excluded except when your policy incudes "mechanical breakdown" and/or machinery coverage.



Talk with your insurance advisor.







Photo By PenginOpus

A Year Is Not Enough - Maybe

Most property insurance programs limit coverage for loss of business income to 12 months.



Is that long enough for you? In many areas the time it takes to get permits and meet regulations can eat away 3 months or more. You need a contractor who can move quickly, and you may deal with labor and material shortages if your building is destroyed in a wide-area disaster.



Think about extending your business income insurance to 18 months.

Earthquake is Not Covered!

The horrible events in Haiti means that many of my conversations with clients include questions about earthquake.



Here is the short answer... Standard property insurance policies exclude earthquake. Home insurance excludes it and business property insurance excludes it.



The following exclusion is from a commonly used business property insurance policy:



B.1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.



b. Earth Movement



(1) Earthquake, including any earth sinking, rising or shifting related to such event;



(2) Landslide, including any earth sinking, rising or shifting related to such event;



(3) Mine subsidence, meaning subsidence of a man-made mine, whether or not mining activity

has ceased;



(4) Earth sinking (other than sinkhole collapse), rising or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil condi- tions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water under the ground surface.



But if Earth Movement, as described in b.(1) through (4) above, results in fire or explosion, we will pay for the loss or damage caused by that fire or explosion.



(5) Volcanic eruption, explosion or effusion. But, if volcanic eruption, explosion or effusion results in fire or Volcanic Action, we will pay for the loss or damage caused by that fire or Volcanic Action.



In most areas the coverage is available at an extra premium - sometimes a great deal of extra premium.

Coinsurance Video

My latest insurance information video...  How  coinsurance works on your business property insurance policy.

Water Detection Devises

Water damage from plumbing systems is a major cause of property losses. Pipes break, toilets overflow and keep going. Cold weather causes freeze-ups and spurting water when it thaws.

Several companies manufacture water detection devices that monitor water flow and shut the water off at the source when a leak is detected.

For home and commercial properties...

Flo-Guard

FloLogic

Leak Defense System

WaterCop

Some insurers offer discounts on property policies for this type of installation.

Insurance Success Tip #5 - Remove Coinsurance Penalties

Coinsurance in property insurance is a penalty clause - a penalty assessed at the time of a loss. Coinsurance never helps the insurance buyer - it only hurts you. Get your agent to remove all coinsurance penalties from your property insurance.

Insurance Success Tip #2 - Use High Deductibles

Let the insurance company take the big risks. You pay for small losses.

$5,000 is the minimum deductible most businesses should have on property insurance. Same for crime insurance, machinery coverage, and the physical damage portion of your automobile insurance.

Most liability insurance policies do not have a deductible. When someone is hurt or you have damaged their property get your insurance company involved soon. The same day the accident occurred is the best approach.

Don't play the dollar swapping game with your insurance company.

Increased Cost of Construction

"are the costs of betterments required by current building codes, as when glazed safety class must be used to replace standard sheet glass."

From "Burnham's Insurance Dictionary" (www.BurnhamSystem.com) Used with permission.

After the fire many business owners are surprised to learn that their insurance will only pay to replace the building that was - not the building that should be.

Current codes and zoning regulations can increase the cost of reconstruction. Adding protection to pay for the increased cost of construction can save you a great deal of anxiety.

-Upgraded sprinkler systems
-Americans with Disabilities compliance
-Life Safety code improvements
-Electrical system upgrades

Ask you agent how much coverage you have for increased cost of construction.