Law and Insurance

How Does The Eastern District of Texas Federal Court Handle A Fraudulent Insurance Claim? Like Any Other Competent Court - By The Law

Jong Mao v. State Farm Lloyds, Inc., #6:07-CV-310 (E.D. Tex. May 20, 2008).

I don't usually comment on personal lines insurance matters, but this attempt to scam a homeowners insurer caught my attention.  The scheme was as brazen as the court's treatment of it was, well, understated.  Boiled down to essentials, the insured purported to rent a house to herself and collect lost rentals paid to herself after a fire.  However, like most fraudulent schemes, this one requires our attention to a shell game of sorts, or at least an attempt at one.

An individual, Jong Ock Mao, aka Jong O. Mao, aka Jong Ock Hahn, or her trust, the "Jong Ock Mao Declaration of Trust Dated July 17, 2001," is the sole shareholder of two corporations: Jong's Consulting, Inc. and MX Oasis, Inc.  In 2005, Jong's Consulting, Inc. purchased a house in Palestine, Texas, and Ms. Mao purchased, in her own name (one of them anyway) a homeowners policy from State Farm Lloyds.  In December 2005, Jong's Consulting leased the property to MX Oasis for a monthly rental fee of $6,000.  Ms. Mao executed the lease (1) as lessor with name, "Jong Ock Mao," and (2) as lessee with the name, "Jong O. Mao."  Fire destroyed the structure and contents on September 25, 2006.

In a footnote, the Court noted that a notice of lis pendens against the property had been filed on August 26, 2006 as a result of a felony indictment against Jong in connection with a California forfeiture action.  But neither State Farm nor the Court paid much attention to that.

At any rate, State Farm was notified and raised a few questions about the part of the insurance claim for lost rent (the policy covered loss of rental value) because Mao appeared to have rented the property from herself.  In a series of letters from her attorneys (she had a least two of them), Ms. Mao explained the various ownership interests of the companies, confirming on the one hand that she was the "sole owner" of both Jong Consulting and MX Oasis, yet also relating that all her interests had been transfered to the Trust in 2001.  No doubt thoroughly confused, State Farm wrote back and rejected the lost rental claim either because Ms. Mao, the sole policyholder, was a separate legal entity from the corporations, which accordingly had no right to policy proceeds, or the companies were her "alter egos," and she was making dummy rental payments to herself.  So she sued.

The court opted for State Farm's first theory and explained that a shareholder is a distinct legal entity from the corporation.  Because only Jong Consulting had the right to receive rental proceeds, and because the policy covered Mao only in her personal capacity, neither Mao nor Jong Consulting was entitled to policy proceeds. 

Reading between the lines, Mao appears to have outsmarted herself.  The court noted in a footnote that it made no difference whether Mao or the Trust was the sole shareholder of the two corporations.  Yet it appears that Mao hoped to get away with her sleight of hand transaction by pretending that a trust is in a sort of no mans land between corporations and individuals.  In other words, she hoped (I think) that her Trust could masquerade as both policyholder and lessor yet avoid the appearance of the same person paying rent to herself.  However, the Court did not waste breath over the existence of the Trust.  It would not have mattered anyway.  In a shell game, it doesn't matter if the shell is a corporation or a trust - they are both fictions.

The Court is to be commended for handling this case quietly and succinctly, no doubt leaving responsibility for more serious action to the State of California and the extradition process.

Louisiana Supreme Court Agrees that "Flood" Exclusion Is Not Ambiguous

Sher v. Lafayette Ins. Co., No. 07-C-2441 (La. April 8, 2008), See Sher Decision.

"Flood" means flood.  In the latest in a string of defeats for Katrina property owners in New Orleans over the interpretation of the standard flood exclusion in property insurance policies, the Louisiana high court agreed with the Federal Fifth Circuit Court of Appeals in rejecting the interpretation that the exclusion does not apply to floods caused by levee failures due to negligent design.  (See In re Katrina Canal Breaches Litigation, 495 F.3d 191, 214 (5th Cir. 2007). 

Joseph Sher, owner and resident of a 5-unit apartment building, sought property and lost income coverage in the excess of $550,000 after Katrina flood waters had inundated the first floor of his building.  The insurer asserted that most of the damage was caused by poor maintenance and flooding that were excluded under the policy.  Specifically, the exclusion bars coverage for loss caused by "flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not."

The insurer offered to pay less than $3,000.  A trial court awarded Sher over $300,000, but the insurer appealed.  Insurer lost and appealed again.  The Supreme Court reversed.  On the key issue of the interpretation of the flood exclusion, the Court held that the term was capable of only one reasonable interpretation.

The plain, ordinary and generally prevailing meaning of the word "flood" is the overflow of a body of water causing a large amount of water to cover an area that is usually dry.  This definition does not depend on locality, culture, or even national origin - the entire English speaking world recognizes that a flood is the overflow of a body of water causing a large amount of water to cover an area that is usually dry.

This definition, the Court continued, does not distinguish between man-made and natural floods.  Therefore, the term is not ambiguous.  Moreover, the Court observed that even if such a distinction was supportable, no one could reasonably argue that Katrina flooding was not the result of a natural disaster.

For large commercial policyholders, alternative coverage should be available in, say, named-storm coverage.  Private homeowners probably have no alternative to the government-backed flood insurance program which has its own pitfalls. (see, for example, my discussion in Normal Legal Principles May Not Apply with Government Backed Insurance Program).  And here we are again at the beginning of another hurricane season.

New York High Court Allows Consequential Damages For Breach of Contract

Bi-Economy, Inc. v. Harleysville Ins. Co. (N.Y. Feb. 19, 2008) (see Bi-Economy Decision)

The highest court of New York has joined a number of other states that have allowed policyholders to recover consequential damages in excess of the policy limits for a first-party insurer's breach of contract.  "Consequential damages" are those that flow naturally and foreseeably from a breach but are beyond the direct damages that the parties actually contemplated, or probably contemplated, when the the contract was made. 

The seminal case illustrating the distinction between ordinary damages and consequential damages is Hadley v. Baxendale (England 1854) in which H., a mill owner, contracted with B., a carrier (we would say trucker today) to transport a broken mill wheel to engineers for repair by a specified date.  B. failed to deliver the wheel on time, and H sued for damages, including the lost profits for the extra time he lost while the mill was shut down.  B. protested that he was never told that H needed the wheel to keep his mill running, and the damages should be limited to those that were generally foreseeable by the parties at the time of contract.  The court agreed with B that a common carrier was not in a position to appreciate the likely effect of a shipping delay of cargo.  Nevertheless, the principle stuck that the party breaching its contract may be liable for indirect or consequential damages, such as lost profits caused by the breach, if the parties could have reasonably foreseen the consequences had they thought about it.

In this case, a meat market sustained inventory and structural damage from a fire.  The company was insured by a policy that covered loss form fire, including "business interruption," a common type of coverage for lost profits over defined period of interruption caused by the insured peril.  The period of interruption in this policy ended with the repair or replacement of the property, but no more than 12 months.  As often happens, the insurer and policyholder disagreed over valuation issues.  The insurer offered much less for the loss than the insured claimed and agreed to pay no more than 7 months of interruption, even though the company never returned to operation.

The dispute was submitted to alternate dispute resolution.  After more than a year, the insured was awarded more than twice what was offered.  The policyholder then sued for breach of contract and bad faith, alleging that the insurer improperly delayed payment for the direct loss and the full amount of its lost profits, and seeking consequential damages for the complete demise of the business, an amount in excess of the policy limits.  The insurer argued that, in addition to other defenses, the policy itself contained several exclusions of "consequential damages."  The lower courts granted the insurer's motion for summary judgment.

The New York Court of Appeals reversed and held that the insured's loss of its business was a foreseeable and probable result of the insurer's refusal to timely pay to restore the property and the lost income.  The dissent argued that the majority was confusing consequential damages with punitive damages.  The majority responded that consequential damages are designed to compensate a party for reasonably foreseeable damages, and so must be measured by actual loss.  Punitive damages, by contrast, are designed to punish or serve as an example and need not bear a close relation to the plaintiff's actual loss.  At any rate, the Court held that limiting an insured to the amount of the policy, "money which should have been paid by the insurer in the first place, plus interest, does not place the insured in the position it would have been had the contract been performed."

A few other states have awarded consequential damages as a bad-faith remedy.  See Lawton v. Great Southwest Fire Ins. Co., 392 A.2d 576 (N.H. 1978) (Allowing only policy limits plus interest would not make policyholders whole or discourage insurers from delaying a reasonable settlement); Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985)(compensatory damages under policy may exceed policy limits and include damages for economic loss and mental anguish when those damages are reasonably foreseeable).

I am unaware of any Texas case that has awarded consequential damages in excess of the policy limits.  Texas does provide an 18% per annum statutory penalty for delay of payment of a first-party claim (Tex. Ins. Code Sec. 542.051).

Additional-Insured May Not Access Liability Policy Proceeds For Its Own Damages, Court Finds

Ohio Cas. Ins. Co. v. Time Warner Entertainment Co., # 05-06-01437 (Tex. App.--Dallas, Feb. 6, 2008) Court Opinion

After a string of policyholder victories in the Texas Supreme Court (see Texas Supreme Court About Face), Time Warner appears to be testing the waters with this case.  Time Warner (TW) hired a contractor to install fiber-optic cable around the City of Plano.  In addition to requiring the contractor to carry specified types and amounts of liability insurance, TW's contract also required it to be added as an additional insured to the contractor's CGL policy, a very common arrangement.  TW later sued the sub for negligently causing damage to the work and surrounding property.  Again, not an uncommon development.

TW then sued the contractor's CGL carrier seeking $1.5 million for property damages.  The trial court, for reasons not explained in the decision, granted summary judgment to TW.  On appeal, the court readily agreed with the insurer that TW, as the tort plaintiff, had no right to bring a direct action against the defendant's CGL insurer until it obtained a judgment or a settlement agreed to by the insurer.  Texas, unlike Louisiana, is not a "direct action" state.  Plaintiffs may not skip over defendants and directly sue their liability insurers.

TW then boldly demanded coverage for its damages by virtue of its status as an addition insured under the policy, relying on the recent Lamar Homes decision (see Lamar Homes Decision, holding that defective workmanship may constitute a covered occurrence and cause property damage under a CGL policy -- not a contested issue in the TW suit). 

To its credit, the court patiently analyzed the policy language and concluded that TW could not show any claim alleging TW's legal liability for covered damages.  Quoting Allan Windt's respected treatise, Insurance Claims & Disputes, the court observed, "Third-party liability policies require, as a condition precedent to the insurer's liability, that the insured be liable to a third person, by means of either a judgment or a settlement."

What was TW thinking?  Additional-insured status does not convert a third-party liability policy into a first-party property policy or a construction bond.  However, the court refused to render judgment in favor of the insurer and instead remanded the case to the trial court because the insurance claims were not ripe.  In other words, TW might be sued by Plano or adjacent landowners and so might be entitled to liability coverage at that time.  An adverse judgment now might unfairly impair TW's rights to such coverage.

Coverage Upheld For Other's Property In Insured's Control

Lone Star Heat Treating Co. v. Liberty Mut. Fire Ins. Co., 233 S.W.3d 524 (Tex. App.-- Houston [14th Dist.] 2007, no pet.)

This case concerns a dispute over a seldom-used provision found in many commercial general liability policies that cover the insured’s liability for the personal property of others in the insured’s care, custody or control.  The legal issue is whether this coverage was excluded under a fairly standard provision, the “dishonesty exclusion.”  In order to resolve this issue, the appellate court takes a rather lengthy, yet probably necessary, tour through the brambles of agency law.  Here, again, is an example of judges taking pains to get it right.

 

The insured engaged in the business of heat treating metals.  Customers typically shipped metal products to Lone Star for treatment and, after treatment, picked them up during business hours.  In this case, a person arrived at the loading dock after normal hours and pointed to two pallets of treated steel that he was purportedly sent to retrieve.  In this circumstance, the employee on duty was supposed to call the shipping supervisor, a man named Bierman, to confirm the pick up.  Instead, the employee said he could not release the pallets without proper documentation.  The “customer,” who identified himself as “Robert Smith,” said that Bierman knew about the pick-up arrangement but agreed to fill out a ticket for the product, which the employee accepted.  In fact, pallets belonged to different customers, and the steel was never recovered.

 

Lone Star’s general liability policy covered its liability to owners of property in the named insured’s possession.  However, the insurer denied the claim for $78,723.85 based on an exclusion of any loss “caused directly or indirectly by … dishonesty or criminal acts by you, any of your … employees … or anyone to whom you entrust the property for any purposes: (1) acting alone or with others; …”  In an ensuing coverage lawsuit, the trial court agreed with Liberty Mutual that the loss was excluded because it was caused by the dishonesty of Robert Smith to whom Lone Star entrusted the property.

 

Not so fast, Lone Star argued on appeal. “You” is defined in the policy as the Named Insured, not the broader class of other insureds, like Lone Star’s employees.  Because an employee, not Lone Star itself, handed the pallets over to Smith, and the employee was not acting dishonestly, the exclusion shouldn’t apply.  Liberty Mutual countered this argument by pointing out that corporations necessarily act through their representatives.  Because the employee was acting within the course and scope of his employment, he was acting on behalf of Lone Star.  Thus, the exclusion should apply.

 

The court held that the policy clearly distinguished between “you” as named insured and other insureds and rejected any wholesale identification of the corporation and its employees.  “The pivotal question is whether Lone Star entrusted the property. . . .  Accordingly, our focus is on common law doctrines that pertain to the two-party relationship between employee and employer.”  The court determined that Lone Star did not entrust the property to Smith because (1) Lone Star had a defined procedure for authorizing after-hours pick-ups (the employee was supposed to call and get authority from the shipping supervisor); (2) Bierman was not called; and (3) the employee knew he was not otherwise authorized to release the product, and there was no evidence that Lone Star had taken any action that might lead the employee to believe he could deviate from his instructions.

 

Because Lone Star did not give actual authority to its employee to hand the product over to Smith, and the employee had no other instructions that might induce him to believe he could use his own judgment in the matter, the court held that the exclusion did not apply.  Had Liberty Mutual developed evidence that employees routinely acted without express authority, and Lone Star knew about such deviations but took no action to correct them, the outcome might have been different.  The lesson for policyholders is to have and follow reasonable procedures for handling business.  Failure to do so can have unexpected consequences, such as loss of insurance coverage.

Congress passes 7-Year Terrorism Risk Insurance Extension

On December 18, 2007, the House passed the more modest Senate-approved version of the bill to extend the federally-backed insurance program called the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA).  A good description of the changes to this legislation can be found at CRS Summary of TRIREA.  The key features of the bill are:

• extends the program for 7 years
• federal participation begins at $100 million per incident loss
• applies to domestic as well as foreign acts of terrorism
• requires ongoing reports to Congress on inclusion of coverage for group life and nuclear, biological, chemical and radiological (NBCR) events
• caps federal participation at aggregate $100 billion

The White House has opposed federal participation in the program but is expected to sign this compromise extension.

Liberty Mutual Expands CGL Coverages For Specific Industries

Aimed at middle-market general liability (“CGL”) customers, Liberty Mutual Group announced 11 automatic coverages designed to address such common gaps as unintentional failure to disclose, mental anguish, coverage for health care professionals,, and coverage for injuries to co-employees resulting from Good Samaritan acts.  See New Coverages for fuller announcement.

Named Liberty Direct Solutions(TM), Liberty Mutual’s new “expanded” property and casualty products are targeted for select industries, including:

• Contractors

• Manufacturers

• Fabricated Metals Manufacturers

• Wholesale Distributors

• Retailers

• Food Processors

• Restaurant Owners

• Real Estate and Commercial Property Managers

• Professional Service Providers and

• Janitorial Service Providers

As the property/casualty market softens, competition increases for new business.  Whether these expanded products prove worth while to policyholders, of course, remains to be seen.  Still, I take this as a hopeful sign of a healthy market.

Property/Casualty Insurance Market Predicted to Remain Soft in 2008

In a press release last week, Watson Wyatt Worldwide, a respected insurance and financial services company, predicted continuation of rate decreases for casualty insurance coverage in 2008. See Watson Wyatt Worldwide Report.  "It's clearly a buyer's market," comments Orin Linden, property and casualty practice leader of Watson Wyatt's consulting group in New York.  Mr. Linden predicts that competition and "healthy capacity" should force insurers to continue lowering premiums by as much as 5 to 10 percent.  The report also indicates that this trend will continue in other segments of the insurance industry, including workers' compensation, directors & officers liability, and reinsurance.

"With the marketplace showing little sign of hardening, it may be an ideal time for buyers to review their risk management program structure and insurance policies," Linden said.  "Buyers clearly get better terms in softening markets.  However, they need to be well-positioned so that when the market firms up, they have a plan to move forward."

House Bill Would Create Federal Guarantees for Disaster Insurance Program

Yesterday, the U.S. House of Representatives passed on a vote of 258 to 155 a bill designed to backstop private property insurance in the event of huge natural catastrophes like Hurricane Katrina or the San Diego fires.  Opponents of HR 335 (known as Homeowners' Defense Act of 2007), including the White House, say the legislation would shift business from the private market to the federal government and would unfairly benefit disaster-prone states like Florida and Louisiana at the expense of other states.

Under the program, individual states would enter pooling arrangements to provide reinsurance for private insurers (reinsurance covers part of the insurers' risk in issuing private insurance).  If a catastrophic event results in damages above a certain threshold (measured by disaster costs that exceed 1.5 times the amount of premiums collected from homeowners and businesses in the previous year), the affected state could apply for loans from the federal government.

The bill's sponsor's, Reps. Ron Klein (D-Fla.) and Tim Mahoney (D.Fla), assert that the measure is necessary to reassure private insurers that affordable reinsurance is available and to absorb the costs of the largest natural disasters without the need for post-hoc government bailouts.  The insurance industry is divided over the legislation.  The Big "I" (Independent Insurance Agents and Brokers of America) support the bill; The AIA (American Insurance Association) believes the Act will not create incentives as advertised for private insurance markets.

Sens. Hillary Clinton (D-NY) and Bill Nelson (D-Fla.) have introduced similar legislation in the Senate.  President Bush has indicated he will veto the measure.

For more information on this bill, see NY Times House Approves Creation of a Federal Disaster Insurance Program.

Insurers Lose First Challenge to "Known Loss" Exclusion in CGL Policies

Transportation Ins. Co. v. The Regency Roofing Cos., Inc., 2007 U.S. Dist. LEXIS 74364 (S.D. Fla. Oct. 2, 2007)

This is the first test case of the so-called "known loss" exclusion that has been written into most standard commercial general liability  (CGL) policies for about five years.  This exclusion bars coverage for any "bodily injury" or "property damage" that any insured knew had occurred or begun to occur before the inception of the insurance policy.  As the court put it, "In other words, to be covered, the Insured must have been unaware of any property damage prior to the Policy period, and must have first learned of such damage during the term of the Policy."

The rationale behind this exclusion is simple and reasonable: you can't wait until your house burns down to go out and buy fire insurance.  Courts have always refused as a matter of public policy to allow insurance coverage for a "known loss."  However, over the last decade or so, the insurance industry has pressed this doctrine aggressively, as the facts of this case illustrate. 

Regency Roofing was hired in 1999 to re-roof a large residence that included 11 flat roofs.  Over the course of the the following two years or so, Regency was called back several times to fix leaks around skylights and flashing.  On at least one occasion, the contractor reported rust in an air conditioning duct.  In January 2002, the homeowners sued Regency for alleged property damage, including mold damage, arising from faulty repairs.  Regency submitted the claim to its CGL insurer, who challenged coverage under the "known loss" exclusion.  The insurer argued that Regency had sufficient awareness of the roof leaks prior to the inception date of the CGL policies (Transportation issued several consecutive policies) to trigger the exclusion.  The court disagreed.

The court held that even if some of the damage is excluded, either because Regency knew about it before the policy period or because of other exclusions, the homeowners did not complain of mold damage until after the first CGL policy began.  Accordingly, the court denied the insurer's motion for summary judgment. 

The "known loss" exclusion is a potential trap particularly for building contractors who make several attempts to cure a problem hoping to satisfy the customer and so do not report the complaint to their insurer until the customer's patience wears thin and a lawsuit is filed.  By then, the "known loss" exclusion may bar coverage.  An illustration of this dilemma is Blanton v. Vesta Lloyds Ins. Co., 2006 Tex. App. LEXIS 1823 (Tex. App.---Dallas, March 9, 2006), in which a commercial landlord, insured under a standard CGL, leased an older structure to a retail tenant, who experienced problems with the roof.  The Tenant said the roof leaked whenever it rained and complained more than 80 times over a 2 and half year period before filing lawsuit.  Landlord attempted to fix the roof after each complaint.  Suit was filed October 24, 2000, and Landlord submitted the petition on December 6, 2000. 

The insurer in the Blanton case sought to avoid coverage under a late-notice theory rather than known loss, but the problem is similar.  Policyholders usually do not submit claims until there is a lawsuit against them.  In fact, the CGL insurer arguably has no legal duty to take any action until suit has been filed (policies vary on this).  But waiting until the lawsuit is filed may put coverage at risk because of late-notice or known-loss defenses. 

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Arbitration Agreements Are Next To Impossible To Break.

In Re U.S. Home Corporation, et al., #03-1080 (Tex. October 12, 2007)

This decision from the Texas Supreme Court illustrates how difficult it is to get out from under an arbitration clause in a contract.   Because many insurance policies contain clauses requiring any coverage disputes to be decided by arbitration rather than litigation in the courts, this case is worth a comment.  This is actually a ruling on a writ of mandamus rather than the typical appeal of a lower court's disposition of a case on it merits.  Mandamus is a procedure for challenging a lower court's  ruling on a pre-trial matter like a motion to compel discovery, or, as in this case, a motion to compel arbitration in lieu of litigation.

The plaintiffs sued their homebuilders alleging that their houses were built without shower pans.  The contracts signed by the plaintiffs contained clauses requiring that any disputes arising under the contracts will be determined first by mediation and, failing mediation, second by arbitration.  In general, consumers usually believe that they have a better chance of obtaining a favorable outcome before a jury in litigation rather than a panel of industry experts (or dispute resolution experts) on an arbitration panel.  At any rate, the plaintiffs in this case felt that way and sought (and obtained) a court decision that they were not compelled to submit to arbitration.  The builders filed for a writ of mandamus ("mandamus" is a Latin word meaning "we command," and is the name of the procedure in common law whereby a superior court compels a lower court to perform correctly mandatory yet purely ministerial duties).

The Supreme Court granted the writ conditionally (meaning that the Court declared what the lower court should do if the writ were actually drawn up, signed, and wrapped in red tape -- the conditional grant seems less officious).  The following are five arguments frequently raised to avoid arbitration agreements and the Court's reasons for pouring them out:

 

1. The trial court found the arbitration clauses were contracts of adhesion and thus procedurally unconscionable. But the High Court held: “Adhesion contracts are not automatically unconscionable, and there is nothing per se unconscionable about arbitration agreements.”

    

2. The trial court found the arbitration agreements were procured by fraud. But the Court countered:  “The plaintiffs pointed to no evidence of misrepresentations, scienter, or reliance, instead arguing only that the arbitration clause was on the back of their single-sheet contract. As they concede no one prevented them from reading both sides, this is not fraud.. Like any other contract clause, a party cannot avoid an arbitration clause by simply failing to read it.”

    

3. The trial court found the arbitration clauses were not supported by mutual consideration. But, the Court observed, “As both parties agreed to arbitration, this is again simply wrong.”

    

4. The trial court found arbitration would be unduly burdensome and costly. “To sustain such a defense, both the United States Supreme Court and this Court require specific evidence that a party will actually be charged excessive arbitration fees.”

    

5. The trial court found that mediation was a condition precedent to arbitration, and the former having yet to occur the latter could not be compelled. “But while the parties’ agreements clearly contemplated mediation before arbitration, there is no indication they intended to dispense with arbitration if mediation did not occur first.” 

The lesson is that it is almost impossible to avoid arbitration once the parties have agreed to it.

Insurer's Failure to Strictly Follow Policy's Appraisal Procedure Voids Award

Richardson v. Allstate Texas Lloyd's, 2007 Tex. App. LEXIS 7699 (Austin, Sept. 27, 2007)

Just about all property insurance policies, personal and commercial, contain mandatory appraisal clauses that specify a procedure for appointing one or more independent appraisers to quantify the damages the insurer owes (assuming the claim is covered -- appraisers are barred from deciding whether the policy covers the claim).  The common belief is that the appraisal process favors the insurer because juries would award higher damages than appraisers.  True or not, the Richardson case teaches the party seeking to enforce the appraisal award to adhere strictly to all the appraisal procedures.

The appraisal clause in the Richardson policy is typical.  When the insurer and policyholder do not agree on the the valuation of certain damage (whether "actual cash value," "cost of repair or replacement," or "amount of loss"), either can make written demand for appraisal, whereupon each selects a competent, independent appraiser, and the two appraisers choose an umpire.  The two appraisers then set the amount of the loss, "stating separately the the actual cash value and loss to each item."  If the appraisers fail to agree on the amount, they submit their differences to the umpire.  "An itemized decision agreed to by any two of these three and filed with [the insurer] will set the amount of such loss."

A catastrophic pressurized infusion of raw sewerage spewed through every plumbing opening in the Richardson house.  A claim was submitted, the insurer disputed the amount of the loss, and appraisal was duly invoked.  The two chosen appraisers met but could not agree on the amount of loss.  Each signed an appraisal form with three columns titled, "ITEM," "LOSS REPLACEMENT COST," and "LOSS ACTUAL CASH VALUE."  The "ITEM" column contained the handwritten phrase, "to be determined by hygienist."  The other two columns were left blank.  The policyholder's appraiser sent a written estimate to the umpire totaling approximately $141,000 (this estimate was not made a part of the court record).  Then the insurer's appraiser met at the umpire's office, and the two of them signed the form on which the sum of $39,650.75 was written under the LOSS REPLACEMENT COST column.  The insurer submitted this form for summary judgment in the ensuing coverage lawsuit.

The trial court granted summary judgment in favor of the insurer, but the appellate court reversed holding that, although Texas will enforce appraisal clauses, they are subject to reversal for three reasons:  the award was made (1) without authority, (2) as a result of fraud, or (3) not in substantial compliance with the terms of the insurance policy.  The appellate court found a failure of substantial compliance with the terms of the appraisal clause because the record failed to reflect which items were agreed and which were disagreed, the policyholder's appraiser apparently never saw the insurer's itemized list of damages, and the record fails to reflect an itemized list of damages.  Therefore, the award was set aside, and the case was remanded presumably for the jury will decide the amount of damages.

This case provides a road map for both preparing and attacking an appraisal award.  It is surprising how seldom competent engineers and appraisers do not read the policy or follow the procedures spelled out in the appraisal clause.  For the party seeking to enforce the award, usually the insurer, strict adherence to the terms of the policy is essential.  A court should enforce the award as long as the three conditions stated above are met. The party attacking the award should scrutinize the appraisal clause closely for material deviations from the specified procedures.

Loss Payee Loses Fire Coverage When Designation in Policy Was "To Follow"

Scottsdale Insurance Co. v. Mason Park Partners LP, #07-20102 (5th Cir. September 14, 2007, per curiam)

The owner of commercial property required the lessee of a restaurant to procure insurance against fire and liability and add the owner as loss payee on the fire insurance policy.  The purpose of the ubiquitous loss payee arrangement is to ensure that, in any dispute over the insurance proceeds from the fire insurance, the owner/lessor receives payment first up to the amount of its interest.  Lenders and landlords the world over rely on this device to preserve their priority right to insurance proceeds.  But the device only works if the policy is properly endorsed to reflect the identity of the loss payee.

In this case, after the insured restaurant burned down, the insurer refused to recognize the lessor's rights to the proceeds because the loss payee endorsement bore only the cryptic directive: "to follow."  The endorsement was subsequently canceled, but the insurer was not bound, as would normally be the case, to notify the loss payee of cancellation because no name or address was provided for this purpose.  Therefore, the court had no alternative but dismiss the landlord's action against the insurer.  The case doesn't say what action, if any, the landlord may have against the tenant for failing to see to it that the policy was properly endorsed.  It appears to be one of those little details that so frequently get lost in the shuffle.

The lesson for risk managers is that courts will rarely look beyond the terms of the policy to ascertain the true arrangements between the contracting parties.  Doubtless, the landlord could easily prove its status as property owner and security holder through numerous documents.  But none of this evidence is usually admissible to determine the legal effect of the insurance contract.  The loss payee must protect its rights by insisting on proof that the policy was endorsed.  The best proof is a certified copy of the policy.  At least, the loss payee should insist on receiving a copy of the loss payee endorsement.  Short of this, the landlord is at risk of having nothing at the end of the day but the smoldering ruins of its leasehold.

Developer’s Failure To Grant An Easement Did Not Constitute “Loss of Use of Tangible Property” Or “Wrongful Eviction” under CGL Insurance Policy

In this case, a Texas appellate court narrowed the scope of two provisions of the standard commercial general liability policy.  Coverage A of most CGL forms covers “property damage” (“physical injury to tangible property”) but includes “loss of use of tangible property,” even if the property is not injured.  Coverage B covers a number of enumerated “personal injury” offenses, including “[t]he wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord, or lessor." 

 

Over the years, policyholders have tested the coverage boundaries of these two provisions.  In this case, a residential developer sued its CGL insurer for refusing to indemnify and defend it against a homebuyers’ lawsuit over alleged failure to grant an easement to use certain lakeside property as a park. The developer argued that the homeowners’ alleged loss of an easement constituted a loss of the use of tangible property, or alternatively, an “invasion of the right of private occupancy of…premises.”  The insurer and the court disagreed.

 

The court accepted the insurer’s argument that, although an easement might constitute “tangible property” under the policy, the landowners alleged only that the developer failed to grant them a promised right, and did not allege a loss of the property’s use.  The court reasoned that causing the absence of such an interest was not tantamount to causing a loss of the property’s use because the homeowners never had more than an intangible interest in the property.

The court also refused to accept the developer’s second argument that the alleged failure to grant an easement was an “invasion of the right of private occupancy of…premises.”  The court conducted a cursory review applicable cases, Texas and beyond, and followed the rulings in the 9^th and 10^th Circuits in concluding that the property interests ordinarily protected under personal injury coverage, such as a protection from wrongful eviction or wrongful entry, are clearly distinguishable from nonpossessory interests, such as the homeowners’ easement.

Robert Trotter Gift Fund for Thomas v. Trinity Universal Insurance Co., No. 03-05-00330-CV (Tex. App.-Austin, September 13, 2007)

Texas High Court Allows CGL Coverage of Construction Defects

Lamar Homes, Inc. v. Mid-Continent Casualty Co., #05-0832 (Tex. August 31, 2007)

In a watershed decision, the Texas Supreme Court has decided that a commercial general liability (CGL) insurer must defend insured contractors and builders against lawsuits alleging damage caused by the insured's construction defects.  The critical insurance coverage issues are whether a contractor's defective work could constitute an "occurrence" (basically, an accident) and whether damage to the insured's construction work (as opposed to other property that the insured did not work on) could constitute "property damage" (physical injury to or loss of use of tangible property).  This decision resolves one (or perhaps two) of the biggest insurance-coverage debates of the decade and will have lasting influence on how other coverage disputes will be analyzed under Texas law over the basic insuring language of the now ubiquitous CGL policy insuring agreement .

Facts.  The homeowner plaintiffs sued the builder, Lamar Homes, after discovering cracks and leaks attributed to faulty construction of the foundation.  The builder's CGL insurer refused to defend or indemnify the lawsuit asserting that: (1) the alleged faulty workmanship was not an occurrence because it was the result of deliberate conduct (i.e., breaching one's contract), not an accident; and (2) damage to an insured's own work or products could not be property damage under the "economic loss rule" (barring a plaintiff from recovering tort damages for economic losses resulting from a breach of contract). 

Economic-Loss Rule.  If I buy a defective toaster that explodes, my claim against the seller is limited to my economic loss, the remedy allowed under contract law (what I paid for the toaster), unless the explosion also damaged other property or caused bodily injury, in which case I can recover tort damages for the seller's negligence (or - the jackpot - punitive damages if I can prove gross negligence).  The insurer in Lamar Homes asserted that CGL policies cover only torts, not breach of contract.  Therefore, damage to the insured's work cannot be property damage under a CGL policy.

Occurrence.  The court first found that faulty workmanship could be the result of accidental conduct because a deliberate act can be performed negligently.  Much ink has been spilled on this issue, to which the Court has added the following formulation paraphrasing one of its earlier decisions:

[A] claim does not involve an accident or occurrence when either direct allegations purport that the insured intended the injury (which is presumed in cases of intentional tort) or circumstances confirm that the resulting damage was the natural and expected result of the insured's actions, that is, was highly probable whether the insured was negligent or not.

The Court was careful to say that "whether an insured's faulty workmanship was intended or accidental was dependent on the facts and circumstances of the particular case."  Presumably, if the insured deliberately substituted an inferior ingredient or used substandard materials to cut costs, the defective workmanship would not be a covered occurrence.  If, on the other hand, the defective work was the result of shoddy work by shirking employees, the builder could not be denied a defense. 

But the thing to remember is that this is a duty-to-defend case.  The Court restricts its analysis to the allegations in the pleadings, not to the actual facts of the particular case.  From now on, a lawsuit alleging negligent workmanship, without much detail, will trigger the CGL insurer's duty to defend.

Property Damage.  The second issue is perhaps even more important.  If a court relies on the economic-loss rule to bar CGL coverage for a property-damage claim because it "sounds in contract," does that mean that conduct in the performance of a contract could never be covered?  If even part of a plaintiff's claim was breach of contract, a court might be persuaded to dismiss it because it "sounds in contract".  The Lamar Homes Court short-circuited the whole line of inquiry by putting the economic-loss rule out of insurance law.  "It is a liability defense or remedies doctrine, not a test for insurance coverage."  More importantly, the Court held that CGL policies are not restricted to covering torts. 

Dissent.  Three Justices filed a vigorous dissent, primarily attacking the majority's rejection of the economic-loss rule.  "Selling damaged property is not the same thing as damaging property."  The dissent also argues that the Court is following the minority view of courts across the country, but the majority dispute this assertion.

In the final analysis, as the Court observes, CGL policies will not necessarily cover defective workmanship because so-called "business-risk" exclusions target for elimination damage to the insured's work and replacement of the insured's defective products.  Nevertheless, as the Dissenting Opinion points out, the practical effect in many cases will be that small subcontractors, who typically bear the responsibility for covering the general contractor and the owner in construction mishaps, will end up carrying a larger portion of the risk, and their premiums may rise.  Also, insurers will almost surely be required to defend more construction-defect lawsuits.

The Lamar Homes Court also holds that a Texas statute allowing a penalty for delayed payment of "first-party claims" does applying to defense costs an insured incurs under a CGL policy.  But that is an issue for another day.

Report Details Fraudulent Claims-Adjustment Practices in Homeowner Insurance Industry

In response to widespread insurance abuses reported in the 1960's and 1970's, many states, including Texas, instituted consumer protection laws to curb sharp practices and punish insurers that delay or refuse to pay meritorious claims.  According to a recent article by David Dietz and Darrell Preston published on Bloomberg.com (Home Insurers' Secret Tactics Cheat Fire Victims, Hike Profits), homeowners are facing a current wave of abuses designed to underpay property losses.  The authors provide numerous details of how such large insurers as Allstate and State Farm train adjusters to make low ball offers for damaged or destroyed homes and fight vigorously if the policyholder holds out for full replacement cost.

Perhaps most disturbing is evidence developed through discovery in several lawsuits across the country that insurers have relied on advice of consultants, particularly a New York-based consulting firm called McKinsey & Co., advising insurers on methods to raise profits by paying out less in claims.  For example, one powerpoint slide shown in a Kentucky court room entitled "Good Hands or Boxing Gloves" advises Allstate adjusters to make an initial low offer.  If the policyholder accepts the low offer, McKinsey's slide tells the adjuster to treat the person with good hands.  "If the customer protests or hires a lawyer, Allstate should fight back."

Another reported practice is the use of computer programs, including "Colossus" and "Xactimate," that allegedly calculate insured losses and systematically underpay policyholders without regard to the validity of each individual claim.  This article also reports on insurer practices of rewarding adjusters who underpay claims.

At a time when insurance company profits have increases year to year, despite Katrina-related losses (the article reports property-casualty profits up 49% in 2006), reports like these may well spur another cycle of consumer protection legislation.

5th Circuit Asks Texas Supreme Court To Declare When "Property Damage" Occurs Under Standard CGL Policies

One Beacon Insurance Company v. Don's Building Supply, Inc. (5th Cir. August 8, 2007)

The list of key insurance coverage cases pending before the Texas Supreme Court has just grown.  (For a list of insurance cases pending before the Texas High Court, see Pending Insurance Cases).  The Federal 5th Circuit Court of Appeals faced a common dilemma under Texas law: Under an occurrence-based commercial general liability (CGL) policy, when does "property damage" occur?  In other words, what must happen with the policy period: actual physical injury or the noticeable manifestation of that injury? 

In this case, homeowners sued their builder for installing a defective insulation product resulting in leaks that caused progressive yet hidden damage over a number of years.  The homeowners claimed that most of the actual physical injury to the structure took place during One Beacon's policy period (more than two years before suit was filed), but, to avoid a two-year statute of limitations, they invoked the "discovery rule" and argued that limitations period must be extended because the damage was so hidden as to be "inherently undiscoverable" until the damage became noticeable or manifested.

A CGL policy covers damage that "occurs" within the policy period.  The policies in this case were in effect more than two years before suit was filed when the physical injury existed but before it was discovered.  The 5th Circuit noted that Texas cases disagreed as to when property damage occurs.  Some cases, including the 5th Circuit itself (in Guaranty Nat'l Ins. Co. v. Azrock Indus., Inc. 211 F.3d 311 (5th Cir 1998)), had held that property damage occurs when it becomes manifest or identifiable.  However, the court noted that a few Texas cases applied an "exposure rule" holding that damage occurs when property is exposed to injurious conditions (see Pilgrim Enterprises, Inc. v. Maryland Cas. Co., 24 S.W.3d 488 (Tex. App.--Houston [1st Dist.] 2000, no pet.))  The Texas Supreme Court has yet to settle this issue, usually called "trigger of coverage," concerning both bodily injury and property damage (see American Phys. Ins. Exch. v. Garcia, 876 S.W.2d 842 (Tex. 1994) (noting various trigger-of-coverage approaches applied by courts, including "manifestation" and exposure, without deciding which should be applied.)

The One Beacon court faced a second dilemma.    The homeowner plaintiffs alleged in the pleading that actual damage was continuing and progressive and occurred during the policy period, but remained undiscoverable for purposes of the discovery rule (extending the time allowed to bring a lawsuit until the damage is discoverable) until sometime after the policies expired.  The 5th Circuit did not know whether a plaintiff's assertion of the discovery rule should affect the determination of the trigger of coverage. 

  Accordingly, the One Beacon court exercised its authority to certify two questions to the Texas Supreme Court:

1. When not specified by the relevant policy, what is the proper rule under Texas law for determining the time at which property damage occurs for purposes of an occurrence-based CGL policy?
2. Under the rule identified in the answer to the first question, have the pleadings in lawsuits against an insured alleged that property damage occurred within the policy period of an occurrence-based CGL policy, such that the insurer's duty to defend and indemnify the insured is triggered, when the pleadings allege that actual damage was continuing and progressing during the policy period, but remained undiscoverable and not readily apparent for purposes of the discovery rule until after the policy period ended because internal damage was hidden from view by an undamaged exterior surface?

5th Circuit Pours Out Katrina Insurance Claims: Holds Flood Exclusion Unambiguously Bars Coverage

Most of the insurance lawsuits for property damage caused by Hurricane Katrina, both personal and commercial, hinge on the application of an exclusion for damage caused by flood.  The Fifth Circuit Court of Appeals in New Orleans yesterday settled that question in favor of insurers.  See  In re Katrina Breaches Litigation.  In most cases, the lions share of the property loss was caused by inundation after the canals and levees failed rather than the direct effects of wind and rain on homes and offices.  The policyholders argued that the levees failed in part because of negligent design, construction, and maintenance of levees along three canals.  The flood exclusion, they argued, was never intended to exclude damage resulting from human negligence.  The court, applying Louisiana law held that the policy exclusion was unambiguous and excluded damage caused by flood regardless of what caused the flood.

Indiana Appellate Court Holds That Companies Acquiring a Predecessor May Seek Coverage From the Predecessor's Occurrence-based Liability Policies Even Without the Insurers' Consent

Most commercial general liability (CGL) insurance policies contain anti-assignment clauses stating that the policyholder may not assign the right to receive proceeds and other policy benefits to another without first obtaining the insurer's consent.  Up until a few years ago, the law of most states was that once a covered loss had occurred, the anti-assignment clause would not prevent the transfer of insurance rights to a purchaser.  Take, for example, fire insurance on a house.  If I purchase an insurance policy on my house and sell the house to another, the insurer may refuse to cover a fire loss if the house burns down after the sale.  The reason for this is that the insurance company has the right to decide whether the owner is a worthy risk.  The insurer has the right to decide if I am a careful property owner who will take care to avoid fire risks.  The person buying my house may not be so careful, so the insurer has the right to refuse to transfer the policy benefits to someone else.  But if the fire occurs before the sale, then arguably the insurer should not be able to refuse to pay for the loss, even to the purchaser, because the risk at the time of the loss was the same as the insurer had originally bargained for.  That, at any rate was the majority position.

In 2003, the Supreme Court of California reached a different conclusion in Henkel Corp. v. Hartford Acc. and Indem., 62 P.3d 69 (Cal. 2003), holding that rights to coverage under a CGL policy could not be transferred without the insurer's consent, even though the covered event had occurred before the sale of the policyholder to a successor company.  The Henkel court's reasoning was based on fairly arcane principles of property law that boiled down to a determination that a right to liability insurance proceeds was freely transferable (without the insurer's consent) only after that right was reduced to a fixed monetary sum.  The benefits due under a CGL policy are the right to a defense of a lawsuit and payment of a judgment or settlement of covered liabilities.  Those rights are reduced to a fixed amount only after a lawsuit is brought and resolved.  When one company purchases another, the purchaser usually assumes the seller's existing liabilities that arose out of conduct that may have occurred years before the sale.  Occurrence-based CGL policies cover liability-causing events occurring within the policy period, so the purchaser expects to receive, along with the seller's liabilities, the benefit of the seller's CGL policies in effect at the time of the occurrence.  The purchaser then must face the post-sale lawsuits for those pre-sale liabilities.  The Henkel case denied the purchaser the right to coverage without the consent of the insurer.

Now, the Indiana Court of Appeals has reached an opposite conclusion in Travelers Cas. and Sur. Co. v. United States Filter Corp., 2007 Ind. App. LEXIS 1661 (July 24, 2007).  In this case, U.S. Filter Corp. had purchased a company that had changed hands several times in the past but had continuously manufactured a product known as a "wheelabrator blast," a piece of heavy machinery that throws off silica as a by-product, thereby creating lots of silicosis liability over the years.  The court took note of the California precedent but cited a U.S. Supreme court case, Century Tablet Mfg. Co. v. United States, 94 S. Ct. 2516 (1974) for a distinction between the assignability of rights to insurance proceeds as opposed to other contract rights.  The key distinction is that, once a covered loss has occurred, the casualty is fixed and cannot be rescinded in the same was that an executory contract to sell may be rescinded.  Therefore, the Indiana court held that the purchaser obtained rights to coverage when it received the predecessor's liabilities.  The anti-assignment clauses in those CGL policies did not cut off rights to coverage because the covered occurrence were fixed at the time of sale.

It remains to be seen which way courts in other states will go.  For the record, Texas has long been in the minority holding that an anti-assignment clause prevents a purchaser from obtaining coverage even if the occurrence preceded the sale.  See Insurance Co. of Penn. v. Hutter, 2001 U.S. Dist. LEXIS 5800 (N.D. Tex. 2001).

Subcommittee Sends Terrorism Insurance Extension To Full Committee For Vote

This week, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises moved the federal Terrorism Risk Insurance Revision and Extension Act on to the full House Financial Services Committee for a vote.  First passed in 2002, the Terrorism Risk Insurance Act (TRIA) provides government participation above a certain cap in the event of property and casualty loss caused by an act of foreign terrorism.  First extended in 2005, H.R. 2761 proposes to extend the program for an additional 10 years with significant modifications.

The bill, approved by the subcommittee by a vote of 26 to 17, eliminates the distinction between foreign and domestic terrorism; lowers the program's event triggers for the federal government backstop from $100 million to as little as $5 million; adds group life insurance; creates a blue-ribbon commission to develop long-term recommendations; and improves coverage for nuclear, biological, chemical, and radiological terrorism events.

The insurance industry generally supports this legislation but is cautious about covering nuclear, biological, chemical, and radiological events, which could cause more catastrophic losses than conventional terrorist attacks.  For a fuller discussion of this legislation, see Insurance Journal.

Can Construction Damage Caused by Poor Workmanship Ever Be Covered By a CGL Policy? Federal District Court Takes a Step Closer To Saying “No”

Note: The decision in this case has been superseded by the Texas Supreme Court ruling in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 2007 WL 2459193 (Tex. August 31, 2007). See Lamar Homes Decision

 

Charlton v. Evanston Insurance Co., Cause No. SA-06-CA-480-H (W.D. Tex. June 29, 2007)

 

The issue in the Charlton case has divided Texas courts for years.  Standard (and even nonstandard)commercial general liability (CGL) insurance policies cover bodily injury and property damage caused by an "occurrence," defined typically as an accident or exposure to harmful conditions.  Property damage is defined as physical injury to tangible property.  When, as in this case, a building contractor is sued for damage caused by poor workmanship, does the CGL insurer have a duty to defend the lawsuit?

 

The insured builder says, "yes" because the defective construction was not intentional but the result of workers' negligence.  Isn't negligence conduct what you buy liability insurance to cover?  The insurer says, "No," the lawsuit is basically one over a breach of contract and warranty.  If the builder fails to comply with its contractual obligations to perform in a workmanship manner, that is a business decision and creates a business risk, which general liability insurance is not designed to cover.

 

Can the allegation of defective workmanship be a covered occurrence under a CGL policy?  The Texas Supreme Court has before it (and has had since November 2005) the Lamar case on that very issue. 

In Charlton v. Evanston Insurance Co., Charlton sued his insurance company, Evanston Insurance, alleging that the insurer failed to provide a defense that it owed under a CGL policy in an underlying lawsuit that alleged that Charlton failed to properly and appropriately provide construction services, materials, and management and caused improper finish grade work, out-of-plumb walls, improperly installed stucco, and similar damages.  The suit also alleged that real and personal property was damaged as a result of water intrusions at the property caused by the faulty workmanship.

 

            Evanston denied coverage, and the court agreed. Although the court noted a split of authority on this issue, it held that the underlying lawsuit had not alleged an occurrence because the allegations “sounded in contract and not in tort.”  What does that mean?  Basically, it means that the underlying lawsuit alleged breach of contract and warranty, not negligence.  Breach of contract “sounds in contract,” and negligence (breach of a duty of care) sounds in tort.  However, the underlying lawsuit brought against Charlton alleged both breach of contract/warranty and negligence.  Never mind said the court.  Despite artful pleading and conclusory allegations of negligence, “the gravamen of Casey’s petition” was breach of contract and warranty.  Ergo, no occurrence.

 

            The court also found no allegation of property damage.  Rather, the court found that the damages sought against Charlton were all “economic damage,” which basically means that the value of the property was diminished without sustaining physical damage.  The court characterized the damage allegation as, in a nutshell, the house that was promised was not the house that was received. The court noted in a foot note that it would have held for the insurance even if it had found an alleged occurrence and property damage because two exclusions applied.

 

            I think the court’s “sounds-in-contract” approach to the occurrence issue is not correct because it short-circuits the true inquiry into whether or not the damage was cause by accidental performance.  In the construction industry, and in many others as well, business operations are performed under contracts.  Lawsuits over faulty construction will invariably, as in Charlton, allege both breach of contract/warranty and negligence.  To hold that the “gravamen” of the lawsuit “sounds in contract” and ignore the negligence allegation is simply to ignore the issue and find in favor of the insurer.

 

            More productive is to examine the factual allegations and ask if the complaint is really about workers making honest mistakes as opposed to choices to take short cuts or substitute faulty materials.  For example, compare decisions in Michigan Mut. Ins. Co. v. Alliance Construction (2005 WL 2297505, S.D. Tex. Sept. 21, 2005) in which a builder did not use a ribbed slab design foundation as called for in the specifications resulting is foundation failures with Courtland Custom Homes v. Mid-Continent Cas. Co., (2005 U.S. Dist. LEXIS 17453, S.D. Tex.) in which subcontractors basically did a sloppy job and wood rot developed from water drainage defects.  The court in Michigan held that the decision to ignore the specifications and substitute different materials was not accidental.  It was a business decision.  In Courtland, the court found that the contractor’s negligent oversight of the work was an occurrence.