Teufel v. American Family (6/14/18)

The court discusses the meaning of an exclusion in a homeowner’s policy. (We’ll condense things a bit, omitting minor issues briefly discussed.) The result may well be correct. But the opinion is not a model of contract analysis.

Plaintiff built a house intending to live in it himself, so the story goes, having it built by a company in which he — a “dabbler” in the real-estate business — was merely an investor. But he decided to sell it instead. When part of the property slid down the side of a mountain the buyer sued him in tort and contract, alleging that he was the builder. By this time Plaintiff had bought another house and an American Family homeowner’s policy on it. He tendered the defense to the carrier, which denied it. He sued.

The policy excludes liability “under any contract or agreement.” Does that mean that it excludes any liability that exists because there was a contract (AmFam’s position, accepted by the trial court, which granted it summary judgment)? Or does it exclude only contractual liability (Plaintiff’s position, accepted by the Court of Appeals, which reversed)?

The Supreme Court decides that both interpretations are reasonable and that (citing Wilson 1989) the policy is therefore ambiguous and must be construed “by examining the transaction as a whole, including the policy language and the insured’s reasonable expectations.” “Transaction as a whole” is of course one of those phrases that means whatever a court wants it to mean in a given case. In this case it apparently means nothing; the analysis deals only with policy language and reasonable expectations.

As to policy language, the exclusion said “under” while most other exclusions in the policy said “arising out of.” Whether their meaning differs, the court tells us, is “unclear.” It cites dictionary definitions of both. “Applying these definitions” (note the plural), the court concludes that the provision does not apply “simply because a contract brought [the parties] together”; instead, it excludes only “liability required by or originating from a contract.” In other words, “regardless of the precise meaning of ‘under,'” Plaintiff is right.

So the court uses definitions of both “under” and “arising out of” to interpret a provision that uses one but not the other. The interpretation of either thus remains unclear. But the court is able to combine them using some obscure dialectic that gives meaning to a word “regardless” of its meaning.

“An insured’s reasonable expectations under this policy also suggest that the . . . exclusion does not apply to [tort] liability.” What, you ask, were those reasonable expectations? How did the policy language (the “unclear” policy language) inspire them? How did they “suggest” the result? The court doesn’t actually say; its reasonable-expectations paragraph isn’t an analysis as much as an announcement of conclusions. It gives the strong impression, in fact, that all it really has in mind is what it specifically says in the next paragraph: if AmFam meant to exclude all liability then it should expressly have said so.

(The carrier then argued that in this situation even the tort claim arose out of the contract. The court disagrees, citing Woodward (1984) for the proposition that “a builder–vendor owes a common law duty of care that is independent of a contractual duty.”)

Since the negligence claim is not excluded the insurer must defend, though which claims it must pay for is a question the court sidesteps.

(Opinion: Teufel v. American Family)

Farmers Insurance v. Udall (CA1 6/12/18)

The issue of how homeowners insurers pay — or don’t pay — water-damage claims has been out there awhile. Having spawned a cottage industry of “restoration” contractors, carriers treat them as they do their many similar children (including insurance-defense lawyers) — providing just enough sustenance to keep them alive but maintain their dependence. This case combined four such claims; for clarity we’ll treat it in the singular.

Farmers used a contractor called EcoDry to remediate its insured’s damage. EcoDry’s work order made clear that it worked for the insured but also contained an assignment to it of the insured’s rights, though Farmer’s policy had an anti-assignment clause. Farmers, predictably, declined to pay EcoDry the full amount of its invoice so it sued Farmers under the insurance policy. Farmers moved to dismiss, arguing that EcoDry had no valid assignment and therefore no rights against it. The trial court denied the motion. Farmers filed a special action.

The Court of Appeals accepts jurisdiction but denies relief.

A policy can’t be assigned; you can’t change the insurer’s risk without its consent. But assignment of a claim — i.e., accrued policy rights after a loss — is valid. Farmers argued that assignability isn’t triggered when the amount of the claim is still in dispute. The court disagrees that this affects Farmers’ risk or obligations. The policy requires it to pay the reasonable costs of repair regardless of who pursues that claim.

Whether EcoDry’s broad assignment would allow it to make a bad-faith claim the court leaves for another day since EcoDry — at least in its Amended Complaint — was careful to avoid the issue.

(Opinion: Farmers v. Udall)

Cincinnati Indemnity v. Southwestern Line Contractors (CA1 5/21/18)

The heyday of playing games with the definition of “occurrence” has passed but it remains a perennial pastime for those trying to inflate the value of an insurance policy.

Two apprentice linemen were injured when the power pole they were working on collapsed. They agreed to settle for the apprentice-programs’ policy limits. The question became what those limits were, so the carrier filed this declaratory judgment case to decide that.

The limits in the declarations were $1,000,000 per occurrence, $2,000,000 aggregate. Cincinnati said there was one occurrence, relying on the policy’s definition of “occurrence,” which is nowadays fairly standard language: “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The claimants cited Helme (1987) for the proposition that the number of occurrences depends on the number of negligent acts, of which they counted five. The trial court agreed with Cincinnati.

The Court of Appeals affirms. There was clearly one accident and therefore one occurrence. Helme is inapplicable because in that case (in which injury was caused by the independent negligence of two physicians) the policy defined “occurrence” as “any incident, act, or omission,” or series of related acts or omissions, causing an injury. The opinion isn’t quite clear on how the claimants attempted to square that circle. They argued that the two policies were “functionally the same”; the court politely but firmly disagrees. And they suggested that Cincinnati’s policy language was an attempt “to avoid Helme“; the court notes this without comment but apparently the claimants really were saying, or at least implying, that the interpretation of a policy should depend not on what it says, nor even on what the drafters intended it to mean, but on their alleged bad motives for having it mean that.

(Opinion: Cincinnati Indemnity v. Southwestern Line Contractors)