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Insurance Bad Faith Claim Handling Expert Serving Clients Nationwide

September 2018 Archives

The Seventh Circuit Applies Innocent Co-insured Doctrine In Displacing The Insurance Policy's Intentional Act Exclusion

In Streit v. Metropolitan Casualty Insurance Co., 863 F.3d 770 (7th Cir. 2017), the U.S. Seventh Circuit Court of Appeals held that the insurance company could not rely on the policy's intentional act exclusion to bar innocent co-insureds from receiving coverage for an arson loss because the exclusion conflicted with the terms of Illinois' standard fire insurance policy. In this case, the insured's son intentionally set fire to the insured home. Because the son was related to the insureds and lived in the home, the insurer denied coverage under the policy's intentional acts exclusion. Under Illinois law, if there was a conflict between an insurance policy and the standard fire insurance policy, the standard fire insurance policy controlled. Under the Illinois standard fire insurance policy, an insurer was permitted to disclaim coverage for intentional acts only if the damage occurred by means "within the control or knowledge of the insured." In this case, the insurance company policy permitted the insurance company to disclaim coverage so long as there was any intentional loss caused by any party, including innocent co-insurance. This provision conflicted with the Illinois standard fire insurance policy. Therefore, the Court struck down the policy's intentional act exclusion, finding coverage for the innocent co-insureds. 

Seventh Circuit Court Of Appeals Rejects "integrated 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).

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