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Phoenix Insurance Law Blog

Seventh Circuit Court Of Appeals Rejects "intergrated Systems" Doctrine In Determining Coverage For A Third-party Property Damage Claim In The Context Of Construction Defect Litigation

In Haley v. Kolbe Kolbe Millwork Co., 866 F.3d 824 (7th Cir. 2017) reh'g denied (Sept. 7, 2017) the Seventh Circuit Court of Appeals, applying Wisconsin law, found that a home has components. This case involved a putative class action against the insureds' defective windows that had been installed in residential properties. The District Court applied the "integrated systems" doctrine in finding coverage. The "integrated systems" doctrine extends the "economic loss" rule to cases where a defective product is integrated into a larger product and then the larger product fails to perform as expected due to the defective component. The Seventh Circuit Court of Appeals held that the District Court had misapplied this doctrine. The Court found that the "integrated system" was not considered third-party property damage, but was merely a defective product for which no tort recovery was allowed. The insurance companies argued that the homes were "integrated systems" and the windows that had been installed by the insured were merely components that rendered the entire system (each home) defective. The Court noted that the defective windows had allegedly caused damage to sheetrock, framing, and other components that the insured did not supply and therefore qualified as third-party property damage.

Federal District Court Predicts That The Iowa Supreme Court Will Apply Pro-rata Allocation To Construction Defect Claims

In Pella Corp. v. Liberty Mut. Ins. Co., 244 F.Supp.3d 931 (S.D. Iowa 2017) the District Court held that a CGL policy's non-cumulation clause did not require an "all sums" allocation approach where the insured could recover its entire indemnity obligation from a single insurer, up to the policy limits. However, the Court also held that while pro-rata allocation applied to indemnity costs, an "all sums" allocation applied to defense costs. The policy did not impose a duty to defend, but only an obligation to reimburse defense costs as an allocated loss adjustment expense. The Court noted that while the duty to defend and the duty to reimburse were similar, general principles applicable to the duty to defend, as well as the policy language, allowed the Court to allocate indemnity and defense differently. The duty to defend was broader than the duty to indemnify. The policy did not limit coverage of defense costs to those incurred during the policy period, nor did the policy suggest any allocation method for defense costs. Therefore, the Court concluded that an all sums allocation of defense costs was reasonable.

Nebraska Statute Prohibiting Arbitration Of Insurance-related Claims Was Reversed Preempted By The Federal Arbitration Act Under The Mccarren-ferguson Act

The California Court of Appeals in Citizens of Humanity v. Applied Underwriters, Inc., 17 Cal.App. 5th 806 (2nd Dist. 2017), the court found that Nebraska's Insurance Anti-Arbitration statute had been reverse pre-empted by the Federal Arbitration Act (FAA).

Georgia Court Of Appeals Finds Lead-based Paint Injuries Subject To Insurance Policy's Insurance Exclusion

In Brownlee v. Liberty Mutual Fire Ins. Co., 456 Md. 579, 175 A.3d 697 (2017), the Maryland Court of Appeals, interpreting Georgia law, held that a policy's pollution exclusion applied to bodily injuries resulting from the ingestion of lead-based paint. The Court found that Georgia's interpretation of the pollution exclusion did not violate Maryland's strong public policy that protected victims of lead-based paint. 

On the Horns of a Dilemma, What is an Excess Insurer to do?

Imagine this: an underlying tort lawsuit is being defended by the primary insurer. While the defense is underway, an opportunity arises in which the insured and the primary insurer agree that the proposed settlement of the covered claim should be accepted. However, the amount of the settlement exceeds the primary layer and therefore involves the need for the excess insured to approve the settlement. This situation recently occurred in the U.S. 9th Circuit Court of Appeals case of Teleflex Medical, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 851 F.3d 976 (9thCir. 2017).

Faulty Construction Is Not A "Occurrence" Under Missouri Law

The Missouri Court of Appeals in View Homeowners Association v. Burlington Insurance Co., 2018 WL 2011748 (Mo. App. W.D. May 1, 2018) recently held that faulty workmanship performed on a renovation project did not constitute a policy-defined "occurrence" in a situation where the developer had control and management over the project, as well as having the ability to resolve construction deficiencies and correct substandard work during the project. 


In Lederer v. Gursey Schneider, 22 Cal. App. 5th, 508, 231 Cal.Rptr.3d 508 (2nd Dist. 2018) the issue before the court was when the statute of limitations began to run against an accounting firm that handled the client's insurance needs. It was alleged that the accounting firm failed to procure the requested UIM coverage. The court held that the statute of limitations began to run when the insurance company paid the UIM limit rather than when the insured was injured and discovered the inadequate amount of coverage.


In Los Angeles Unified School District v. Safety National Casualty Corp., 13 Cal.App. 5th 471, 220 Cal.Rptr.3d 546 (2nd Dist. 2017) the court held that California Code of Civil Procedure §1281.2(c) was not preempted by the Federal Arbitration Act. See 9 U.S.C. §1. Under the California Code provision, California courts were permitted to refuse to enforce arbitration agreements when there was a possibility of conflicting rulings in situations where a party to the arbitration agreement was also a party to a court proceeding involving third parties who were not bound by the agreement. The appellate court reaffirmed the trial court's ruling when the trial court denied the insurance company's motion to compel arbitration in a dispute involving coverage for a school district's negligent hiring of several teachers who abused students. In the underlying litigation, the teachers in question abused students for decades and because of this, 26 other insurance companies were also parties to the school district lawsuit. The school district argued that the abuse arose out of a single occurrence. The trial court found that there was a possibility that the arbitrator and the court might issue conflicting rulings and therefore the trial court refused to order arbitration.


In Travelers Property Casualty Co. of America v. Klick, 867 F.3d 989 (8th Cir. 2017) the 8th Circuit held, under Minnesota law, that carbon monoxide was a pollutant for purposes of a policy's pollution exclusion. The pollution exclusion in question required the pollutant to be released into the atmosphere. Under the case facts there was a carbon monoxide build-up in the engine compartment of a boat. When the boat owner went to check on the engine, the boat owner opened the engine compartment hatch, which allowed carbon monoxide to be released into the wheelhouse of the boat. The boat owner was injured when he lost consciousness and fell into the engine compartment and was severely burned while lying on the engine. The boat owner argued that his injuries did not arise out of the release of carbon monoxide into the atmosphere because the engine compartment did not contain "atmosphere." However, the 8th Circuit rejected this argument. The court found that the boat owner was exposed to a pollutant that was not in a controlled environment. The court also found that a reasonable person in the position of the insured would have understood that a person in the wheelhouse of the boat was in "atmosphere."

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