Insurer Not Required to Show Prejudice from an Insured’s Late Notice When the Parties Contract for a Specific Reporting Period

The Fifth Circuit Court of Appeals recently affirmed an order granting summary judgment in favor of the Firm’s insurer client on an issue of first impression in Texas. The issue before the trial court was whether, under Texas law, an insurer is required to demonstrate prejudice resulting from an insured’s failure to comply with an agreed term set in an endorsement to the parties’ insurance contract establishing a specific time limit for an insured to give the insurer notice of a claim.

The case involved alleged damage to an insured’s commercial property from a hailstorm. The insured did not report the alleged loss to its insurer until approximately 17 months after the date of loss. The insurer denied the claim based on a one-year notice requirement in a policy endorsement. The Texas Windstorm or Hail Loss Conditions Amendment Endorsement stated that:

In addition to your obligation to provide us with prompt notice of loss or damage, with respect to any claim where notice of the claim is reported to us more than one year after the reported date of loss or damage, this policy shall not provide coverage for such claims.

The insured sued the insurer in Houston federal court, alleging causes of action for breach of contract and violations of the Texas Insurance Code. The insured argued the insurer was required to show prejudice from the insured’s late notice; the insurer argued that a showing of prejudice was not required. The trial court recognized that this issue had not been decided by the Texas Supreme Court of the Fifth Circuit Court of Appeals.

The Firm moved for summary judgment on behalf of the insurer based on the policy’s endorsement. The trial court granted summary judgment in favor of the insurer and dismissed the insured’s claims.

The Fifth Circuit Court of Appeals affirmed the trial court’s order and held that while insurers are required to show prejudice following the insured’s breach of general provisions requiring notice of loss or damage “as soon as practicable” (and variations thereof), that shifting burden was not required in this case where the parties signed a very specific endorsement that required the insured to submit claims for wind or hail losses within one year.

The Fifth Circuit’s decision is a significant victory for insurers which are often faced with the heavy evidentiary burden of establishing prejudice from an insured’s late notice of property damage claims.

The Oregon Supreme Court Again Offers Expansive View of the Fee-Shifting Statute But Provides Clarity to Insurers on Minimizing Fee Awards

In Oregon, ORS 742.061 authorizes an award of attorney fees to an insured that prevails in an action against an insurer. While there have been several Court of Appeals cases addressing this statute in the UIM context, the Oregon Supreme Court last ruled on ORS 742.061 in 2012, holding that the statute is not limited to actions on policies issued in Oregon, but that it applies broadly, to “any policy of insurance of any kind or nature.” Morgan v. Amex Assurance Co., 287 P.3d 1038 (Or. 2012).

Under a similar analysis, consisting of an examination of the statute’s text and context, along with any useful legislative history, the Oregon Supreme Court addressed another aspect of ORS 742.061 in Long v. Farmers Ins. Co. of Oregon, 360 Or. 791 (2017).  Specifically, the Oregon Supreme Court addressed whether an insurer’s voluntary mid-litigation payments can eliminate the right to attorneys’ fees under the fee-shifting statute.

In Long, Plaintiff discovered a leak under her kitchen sink that caused extensive damage to her home. She filed a claim with Farmers, and on January 17, 2012, and Farmers voluntarily paid $3,300.45 to Plaintiff for the actual cash value of the loss. Around that time, Farmers also paid $2,169.22 to Plaintiff for mitigation expenses. However, the Plaintiff submitted a proof of loss that exceeded the sum that Farmers had paid. The parties had not resolved Plaintiff’s claims a year later, so she commenced a lawsuit against Farmers. After appraisal, Farmers made two additional voluntary payments to Plaintiff – one payment in the amount of $2,467.09 on July 11, 2013 and another payment in the amount of $4,766.80 on August 14, 2013 – for the actual cash value that the appraisers had assigned to certain of Plaintiff’s claimed losses and mitigation costs.

Six months later, in February 2014, shortly before trial, Plaintiff submitted proof of loss for the replacement cost of her losses. Three days later, Farmers voluntarily paid $4,214.18 to Plaintiff for the replacement cost of Plaintiff’s undisputed losses. Farmers subsequently prevailed at trial. Nonetheless, Plaintiff filed a petition for attorney fees under ORS 742.061.

Under ORS 742.061, an insurer must pay the insured’s attorney fees if, in the insured’s action against the insurer, the insured obtains a recovery that exceeds the amount of any tender made by the insurer within six months from the date that the insured first filed proof of a loss. In Long, the issue before the Court was the meaning of the word “recovery.” The insured argued that the word “recovery” means any kind of restoration of a loss, i.e. judgment, settlement, voluntary payment or some other means, after an action on an insurance policy has been filed. Accordingly, any post-complaint payments made by an insurer would support an insured’s claim for fees under the statute. On the other hand, Farmers argued that the word “recovery” means a money judgment in the action in which attorney fees are sought. Farmers argued that attorney fees may be awarded only if the insured obtains a money judgment that exceeds any tender made by the insurer within the first six months after proof of loss.

Because this dispute is a matter of statutory interpretation, the Oregon Supreme Court examined ORS 742.061’s text and context, as well as any useful legislative history. The Court noted that it has repeatedly instructed that the terms of ORS 742.061 and its predecessors should be interpreted in light of their function within the statute’s overall purpose, and if it heeded that instruction in this case, “it becomes evident that the term ’recovery‘ must be read to include mid-litigation payments such as the ones that Farmers made.”

The Oregon Supreme ultimately concluded that the fact that Plaintiff did not obtain a “judgment” memorializing Farmers’ mid-litigation payments did not make ORS 742.061 inapplicable. The Court further clarified that a “declaration of coverage is not sufficient to make ORS 742.061 applicable; an insured must obtain a monetary recovery after filing an action, although that recovery need not be memorialized in a judgment.” Id. at 805.

Based upon that clarification, the Court held that Plaintiff was entitled to attorney fees for the work performed by her attorney up until the time that Farmers made voluntary payments to Plaintiff in July and August of 2013. This is because by then, Plaintiff had brought an action on her insurance policy and, by virtue of Farmers’ July and August payments, Plaintiff had “recovered” more in that action than Farmers had tendered in the first six months after proof of loss.

The Court continued, however, that Plaintiff was not entitled to her attorney fees that accrued after the July and August 2013 payments. First, the voluntary payments made by Farmers in February 2014 were payments for the replacement value of Plaintiff’s loss, for which Plaintiff filed her proof of loss. That proof of loss for replacement value triggered the six-month period for settlement of Plaintiff’s claim for the replacement value of her losses under ORS 742.061, and Farmers made payments for the replacement cost within the six-month period, as mandated by the statute.

Second, except for the two replacement cost payments that Farmers made in February 2014, Plaintiff did not recover, after August 2013, any amount over and above what Farmers had already paid. At trial, Plaintiff sought but was unsuccessful in obtaining any greater sum. Thus, because Plaintiff’s recovery after Farmers’ August 2013 payment did not exceed Farmers’ timely tender, Plaintiff was not entitled to attorney fees under ORS 742.061 for work performed by her attorney after that date.

This case demonstrates how important it is for insurance companies to keep track of when voluntary payments are made and the potential impact of those payments on their ability to minimize an insured’s entitlement to attorney’s fees under ORS 742.061.

Wisconsin Supreme Court Rules That Inclusion of Defective Ingredient Does Not Constitute Property Damage

In Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., et al., 2016 Wisc. LEXIS 12 (March 1, 2016), the Wisconsin Supreme Court in a 3-2 decision determined that two insurers had no duty to cover claims related to damages caused by the inclusion of a defective ingredient in a probiotic supplement because the inclusion of the defective ingredient did not damage other property and did not result in loss of use of property.

Brief Factual Background

Wisconsin Pharmacal Co., LLC (“Pharmacal”) manufactured a chewable Daily Probiotic Feminine Supplement which contained various ingredients, including a probiotic bacterial species known as Lactobacillus rhamnosus (LRA). In July of 2008, Pharmacal contracted with Nutritional Manufacturing Services, LLC (“NMS”) to procure LRA and manufacture the tablets. NMS in turn contracted with Nebraska Cultures for the LRA, and Nebraska Cultures then bought the LRA from Jeneil. The problem, of course, was that Jeniel supplied NMS with the wrong bacteria.

NMS manufactured the tablet with the ingredient it believed to be LRA but discovered that it had used a different bacteria known as Lactobacillus acidophilus (LA). In April 2009, after Pharmacal packaged and supplied the supplement to its retailer, Pharmacal learned that the supplement contained LA instead of LRA. As a result, the retailer recalled the supplement and Pharmacal destroyed the tablets containing the defective ingredient. NMS assigned its causes of action against Nebraska Cultures and Jeneil to Pharmacal, which sued Nebraska Cultures and its general liability insurer, Evanston Insurance Co., as well as Jeneil and its general liability insurer, The Netherlands Insurance Co.


The insurers filed motions for summary judgment, arguing that they did not owe coverage for the loss. The trial court concluded that the insurers had no duty to defend because the incorporation of a defective probiotic ingredient into the tablets did not constitute “property damage caused by an occurrence” because only the product itself was harmed. The intermediate appellate court reversed, concluding the policies provided coverage. The Wisconsin Supreme Court reversed the appeals court and determined that no coverage existed under the policies.

The Netherland’s CGL policy provided coverage for Jeneil’s losses that the “insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’…caused by an ‘occurrence.’” The policy defined property damage as “a) Physical injury to tangible property, including all resulting loss of use of that property. . . .; or (b) Loss of use of tangible property that is not physically injured.”

Evanston’s CGL policy similarly provided coverage for Nebraska Cultures’ losses arising out of “bodily injury” or “property damage” caused by an “occurrence.” The policy defined “property damage” as “physical injury to or destruction of tangible property including, consequential loss of use thereof; o[r] loss of use of tangible property which has not been physically injured or destroyed.”

No Property Damage

The majority determined that there was no property damage, because combining a defective ingredient with other ingredients and incorporating them into supplement tablets formed an “integrated system,” or unified whole. Therefore, the Court reasoned that the defective ingredient (LA), could not be separated from the other ingredients, and no damage resulted to property other than ingredients of the integrated system.  Because the injury was sustained by the integrated system itself, the resulting damage caused by LA’s inclusion in the tablet did not occur to other property.

The Court additionally noted that the defective ingredient rendered the tablets inadequate for their contracted purpose; however, the mere presence of a defective ingredient did not render them hazardous. For this reason, the Court concluded there was no property damage under the Evanston policy.

No Loss of Use

Similarly, the majority rejected the parties’ argument that the incorporation of a defective ingredient rendered the other ingredients and the supplement tablets totally useless to Pharmacal, thereby constituting property damage due to “loss of use of tangible property that is not physically injured.” The Court reiterated that a “diminution in value, even to the point of worthlessness” was not the same as “loss of use.” The Court rejected the insured’s argument and found that Pharmacal did not actually lose use of the tablets, but rather lost the value of the tablets. Thus, the Court held that there was no property damage due to “loss of use of tangible property that has not been physically injured.”

No Occurrence

The policies defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Although it was undisputed that Jeneil’s provision of the defective ingredient was accidental, the Court was not persuaded that the “accidental provision” of a defective ingredient, standing alone, satisfied the Netherlands policy’s definition of occurrence. Under Wisconsin’s American Girl case, the negligent conduct is not the occurrence, but it can cause an “occurrence,” which in turn causes property damage. Here, the provision of the defective ingredient did not cause an occurrence that led to property damage. In other words, the defective ingredient did not cause other property to malfunction or a third party to get sick, so the provision of the defective ingredient alone was not an occurrence.

The Court applied California law to the Evanston policy and followed a line of cases finding that deliberate conduct cannot be an occurrence even if the insured did not intend to cause the injury. So although Jeneil’s provision of a defective ingredient may have been negligent, Jeneil deliberately supplied the ingredient to Nebraska Cultures and intended the ingredient to be incorporated into the tablets. Given the deliberate nature of these actions, the Court found that the provision of a defective ingredient cannot be said to constitute an “occurrence” under California law.

In a dissenting opinion, Justice Shirley S. Abrahamson she disagreed with the majority opinion’s “unwise and unprecedented” application of the integrated system rule, which originates in the economic loss doctrine, to the interpretation of insurance policies. Justice Abrahamson, who was joined in the dissent by Justice Ann Walsh Bradley, compared the application of the economic loss doctrine to the alien creature in the classic science fiction film “The Blob,” noting the doctrine was often incoherent. Justice Abrahamson criticized the majority’s decision for infusing the economic loss doctrine, a tort principle, into insurance policy interpretation. Justice Abrahamson feared that the majority’s approach departed from a reviewing Court’s normal duty of strictly interpreting the plain language of the subject insurance policy.

This decision is available here.

Doctrine of Superior Equities Does Not Bar Assignment of Claim against Insurance Broker

In a recent decision from the Fifth District Court of Appeal, the court held that a negligence cause of action against an insurance broker could be assigned to a third party, including the insurer of an injured party. In AMCO Insurance Company v. All Solutions Insurance Agency, LLC, 16 C.D.O.S. 1521, two separate lawsuits were filed against Amarjit Singh (“Singh”) in connection with a fire caused by Singh’s negligence. Hideo Ogawa and Myong Echols (collectively, “Ogawa”) owned a restaurant that was damaged by the fire. David Saari (“Saari”) owned commercial property that was damaged by the fire. AMCO Insurance Company (“AMCO”) was the commercial property insurer for Saari and paid $371,326 to Saari for damages caused by the fire. AMCO then brought a subrogation action against Singh. Ogawa also brought suit against Singh for losses caused by the fire. Singh tendered the claims to his insurance company but the claims were denied because there was no policy in effect on the date of the fire as a result of the negligence of Singh’s insurance broker, All Solutions Insurance Agency, Inc. (“All Solutions”). Subsequently, Singh entered into stipulated judgments with AMCO and Ogawa and assigned his claims against All Solutions to AMCO and Ogawa.

AMCO and Ogawa as assignees of Singh filed suit against All Solutions. The trial court granted summary judgment to All Solutions holding that Singh’s claim for broker negligence against All Solutions was not assignable. In addition, the trial court held that AMCO and Ogawa’s claims were precluded by the rule of superior equities.

The Court of Appeal noted that the general rule in California favors the assignability of tort causes of action. However, there are exceptions for causes of action for wrongs done to the person, the reputation or feelings of the injured party. Other exceptions include legal malpractice based upon the highly personal and confidential relationship between an attorney and client. All Solutions argued that the same reasons for prohibiting assignment of legal malpractice claims were equally applicable to insurance malpractice claims. However, the Court of Appeal rejected this argument stating that the communications between an insurance broker and client are not privileged or confidential and because of the standardized nature of insurance policies, the product delivered by the insurance broker to the client is not highly unique or personal.

The Court of Appeal also held that AMCO and Ogawa’s claims were not barred by equitable subrogation principles or the doctrine of superior equities. Equitable subrogation refers to the transfer of rights against a third party that arises in equity and occurs only by operation of law because a party (i.e., the subrogee) has paid a loss of another (i.e., the subrogor). The most common equitable subrogation action is one brought by an insurer against a wrongdoer who caused the loss paid by the insurer. In these instances, the doctrine of superior equities has developed based on the idea that an insurer who has been compensated (by receipt of premiums) for issuing a policy should not be allowed to shift the very loss contemplated by the policy to an innocent party. An insurer pursuing a claim for equitable subrogation must demonstrate that it is not attempting to shift the loss to an innocent party. California does not recognize a difference between equitable subrogation and conventional (i.e. contractual subrogation). Accordingly, even a contractual assignment to an insurer from its insured is subject to the doctrine of superior equities. All Solutions contended that the doctrine of superior equities limited the contractual assignments because it was Singh, and not All Solutions, who caused the fire.

With regards to Ogawa, the Court of Appeal held that the doctrine of superior equities did not apply because Ogawa was not a surety (i.e., an insurer). The Court of Appeal also found that AMCO was not subject to the doctrine of superior equities because it did not have a subrogee-subrogor (i.e., insurer-insured) relationship with Singh who had caused the fire. Rather, AMCO insured Saari who had been damaged by Singh. The doctrine of superior equities would have precluded the contractual assignment to AMCO if AMCO had insured Singh. However, AMCO’s insured was Saari and AMCO pursued its equitable subrogation claim against Singh for payments AMCO made to Saari. Accordingly, the doctrine of superior equities did not apply.

Finally, the Court of Appeal held that even if the doctrine of superior equities did apply, All Solutions had not demonstrated through material facts that its equitable position was equal or superior to AMCO. The Court of Appeal criticized the separate statement of undisputed material facts that All Solutions had submitted in support of summary judgment. No facts were introduced demonstrating how the fire losses would have been allocated if All Solutions had obtained the proper insurance for Singh. As a result, the Court of Appeal was unable to determine how the unobtained coverage would have related to coverage provided by AMCO. Accordingly, All Solutions did not demonstrate that its equitable position was equal or superior to AMCO’s equitable position. The Court of Appeal reversed the trial court granting All Solutions’ motions for summary judgment.

Click here for the opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

Hello, Kitty! Can You Smell That Smell? It’s a Covered Loss!

*Republished with permission of the Insurance Coverage Law Bulletin and Connecticut Law Tribune.

The New Hampshire Supreme Court’s recent decision in Mellin v. N. Sec. Ins. Co., 115 A.3d 799, 2015 N.H. LEXIS 32 (N.H. 2015), is getting some attention, and not just because it’s fun to talk about cat pee. The case sets a very important precedent regarding the definition of the term “physical loss” and the construction of pollution exclusions in New Hampshire property insurance policies. It is a decision that is likely going to create uncertainty and increased risk for insurers going forward. The scent-illuminating subject matter is just an added bonus.

1-26The facts started out simply enough. The plaintiffs owned a condominium unit, and their downstairs neighbor had two feline cohabitants. The plaintiffs leased their unit to a tenant in 2009 and 2010, and that tenant was the first person to notice that something didn’t smell right. In November 2010, the tenant decided that he would rather find a new place to live than continue to put up with the noxious odors emanating from below. Undeterred, the plaintiffs moved in themselves and promptly filed an insurance claim under their homeowner’s policy. That claim was denied.

In a continued attempt to take control of the odiferous situation, the plaintiffs contacted the local building and health inspector. After examining the unit, the inspector advised, by way of a letter dated Dec. 22, 2010, that the plaintiffs had “a health problem existing,” and the odor was such that they needed “to move out of the apartment temporarily and have a company terminate the odor.” Unfortunately, remediation efforts were no match for the persistent and pervasive smell of cat urine. The plaintiffs apparently steeled themselves, presumably invested in some scented candles or at least a large can of air freshener, and moved back into the condo until Feb. 1, 2011. At that point, the plaintiffs sold the unit after determining that they could no longer lease it to tenants. Unsurprisingly, they asserted that “the sale price for the unit was significantly less than that for a comparable condominium in the area which was unaffected by cat urine odor.”

In light of this loss and the denial of their claim by the homeowner’s insurer, Northern Security Insurance Company, Inc. (“Northern Security”), the plaintiffs ultimately brought suit, seeking a declaration that they were entitled to coverage for a “direct physical loss” to the unit, namely odor from cat urine. Northern Security moved for summary judgment on the grounds that the smell did not constitute a “physical loss,” and that the claim was barred by the policy’s pollution exclusion.

The trial court ruled in the insurer’s favor, and the plaintiffs appealed. The Supreme Court of New Hampshire began by reciting familiar principles of insurance contract construction: terms shall be accorded their plain meaning; the burden of proof rests with the insurer in a declaratory judgment action; and ambiguities must be construed in favor of coverage.

Are Noxious Odors a ‘Physical Loss’?

The first issue on appeal was whether the trial court erred in holding that the term “physical loss” required a “tangible physical alteration” of the unit, and that the continuous and noxious wafting of cat urine odor did not constitute such a tangible ­physical ­alteration. In addressing this issue, the court noted that the term “physical loss” was undefined in the plaintiffs’ policy, and cited the sixth edition of the Shorter Oxford English Dictionary for the definition of “physical”: “[o]f or pertaining to matter, or the world as perceived by the senses; material as [opposed] to mental or spiritual.” Based on that definition, the court concluded that the term “physical loss” need not be read to include only tangible changes to the property that can be seen or touched, but can also encompass changes that are perceived by the sense of smell.

Turning to case law, the court first recognized that some jurisdictions, like Michigan, have adopted a definition of “physical loss” that is, in fact, restricted to “tangible” changes. In support of its conclusion, however, the court went on to note “a substantial body of case law in which a variety of contaminating conditions, including odors, have been held to constitute a physical loss to property.” Here, the court cited cases from several jurisdictions that, in its view, support a more liberal interpretation of “physical loss.” Among those cases, the court cited decisions from Connecticut (asbestos and lead contamination was physical loss), New Jersey (ammonia release), and Colorado (gasoline vapors).

While the insurer urged the court to follow its own prior definition of the term “physical injury,” the court refused because the case relied upon by Northern Security, Webster v. Acadia Insurance Company, 156 N.H. 317 (2007), turned on the interpretation of the term “property damage” contained in Coverage E, pertaining to personal liability. While the Mellins’ homeowner’s policy contained that same definition, the personal liability coverage part of that policy was not at issue. Simply put, the Mellins’ claim was one for first-party, not third-party, coverage, and was thus distinguishable from Webster.

In ultimately rejecting the trial court’s holding that “physical loss” required “tangible changes,” the New Hampshire Supreme Court articulated the standard that “physical loss” ­requires only a “distinct and demonstrable alteration to the unit” not limited to structural changes and including changes perceived by smell. Interestingly, the trial court’s holding gave effect to the “physical” component of the term “physical loss” by including an ostensible synonym — “tangible” — in its standard of interpretation, while the court did not. Rather than deciding the coverage issue however, the court instead remanded the case to the trial court to apply the newly articulated standard for “physical loss.”

Is the Noxious Odor of Cat Urine Excluded By the ‘Pollution’ Exclusion?

The court next considered the issue of whether the policy’s pollution exclusion would allow Northern Security to relieve itself of its coverage obligation. The operative exclusion disclaimed coverage for “pollutants,” which were defined, in pertinent part, as: “any … irritant or contaminant, including … vapor … [and] fumes.” You may have read that definition, looked at the legal standard above that states that terms must be accorded their plain meaning, and assumed that this second issue would be easily resolved in the insurer’s favor. If so, you would be wrong.

The court began by stating that this definition did not render the term “pollutant” unambiguous. The terms “irritant” and “contaminant” were impugned as “virtually boundless, for there is no substance or chemical in existence that would not irritate or damage some person or property.” As such the definitional phrase “any … irritant or contaminant” was held to be too broad to meaningfully define “pollutant.” Further, the court was persuaded that because other courts have construed similarly worded pollution exclusions in different ways, this meant that the exclusion was ambiguous.

Curiously, nowhere in the court’s analysis did it consider the Oxford definition of the word “fumes”: “Gas, smoke or vapor that smells strongly or is dangerous to inhale; a pungent odor of a particular thing or substance.” It would appear that the latter portion of this definition would end the inquiry, since the smell of cat urine is quite plainly “a pungent odor of a particular thing or substance.” Yet, the court did not engage in this analysis.

Instead, the court held that the policy’s invocation of “vapor” and “fumes,” among other terms, “brings to mind products or byproducts of industrial production that may cause environmental pollution or contamination.” As such, the court held that a reasonable policyholder would not expect these terms to exclude damage resulting from everyday activities gone awry. The court concluded its analysis by construing the ambiguous term “pollutants” in favor of coverage, and holding that the exclusion did not serve to preclude coverage.

In a stinging dissent, Justice Robert J. Lynn harshly criticized the majority’s holding that the pollution exclusion did not apply. Justice Lynn reasoned that “[t]he cat urine at issue in this case fits squarely within the plain and ordinary meaning of contaminant, and is thus a pollutant as defined in the pollution exclusion clause.” He pointed out that the breadth of the exclusion does not mean that it eluded definition and was rendered ambiguous, and further urged that it is ambiguity, not over-breadth, that provides the court with a license to look beyond the plain meaning of the policy. He went so far as to call the majority’s approach “dubious” in following a case that was focused on the historical genesis of environmental pollution exclusions rather than focusing on the plain meanings of the terms at issue. Justice Lynn pointed out that “when a policy’s meaning and intent are clear, it is not the prerogative of the courts to create ambiguities where none exist or rewrite the contract in attempting to avoid harsh results.” He concluded by stating that if the pollution exclusion was overly broad, the remedy must be provided by the open market or the legislature, and not through “creative judicial construction of clear policy language.”

Looking Ahead

All kittens aside, the Mellin decision is bound to leave a physical mark on first-party coverage suits involving “property damage” claims. New Hampshire insurers are going to have a hard time figuring out what isn’t covered as a “physical loss.” The new standard that any “distinct and demonstrable alteration of the unit” could constitute a “physical loss” exposes insurers to endless possibilities of property damage. Since the irremediable stench of cat urine emanating from an adjacent property can satisfy this standard, there is no telling what other odors may satisfy the standard as well. The smell of garbage, sewage, fertilizer, or farm animals kept at a nearby property could potentially trigger coverage, not just for homeowners, but for businesses as well. Likewise, a restaurant moving into the neighborhood and filling the air with the fragrance of faraway spices and fry-a-lator oil might be a covered loss, not otherwise excluded by the pollution exclusion. Looking beyond smells, it stands to reason that an increase or decrease in the amount of sunlight an insured property receives could cause a “distinct and demonstrable change.” Now that there is no requirement of a “tangible” loss, the barn door seems to be wide open for new and creative claims.

Second, it is not clear what language insurers could include in their policies, short of adding increasingly specific language, which would persuasively exclude claims of this type. On its face, it would seem that an exclusion referring to “fumes” would serve to exclude a claim based on urine smells. Yet this is obviously not the case, at least in New Hampshire, and potentially not in any state recognizing the reasonable expectation of the insured over the plain language of the policy. For insureds, on the other hand, it may be viewed as the cat’s whiskers — at least until premiums catch up to the risk.


In sum, the facts of the Mellin case may seem trivial, but the holding is significant as it has far-ranging repercussions for property insurance in New Hampshire and beyond.

Contamination Products Insurance Does Not Cover Recall of Ingredients Supplied to Insured Manufacturer

In Windsor Food Quality Company, Ltd v. The Underwriters of Lloyds of London, et al. (2015) 2015 Cal.App. LEXIS 195, the California Court of Appeal for the Fourth Appellate District held that a contamination products policy does not cover contaminated ingredients obtained from a supplier and incorporated into the insured manufacturer’s product.

The insured, Windsor Food Quality Company, Ltd. (“Windsor”) manufactured Jose Ole frozen food products using ground beef supplied by Westland/Hallmark Meat Company (“Westland”).  The United States Department of Agriculture announced a voluntary recall of all products containing Westland’s ground beef because Westland had used “downer cattle” (non-ambulatory disabled cattle, the use of which is prohibited in human food) that may have been contaminated.  Windsor recalled its products which had incorporated Westland ground beef and incurred an approximate $3 million loss.

Windsor tendered the loss to its contamination products insurer, The Underwriters of Lloyds of London (“Lloyds”).  Lloyds denied the tender on the grounds that its policy did not cover recalled products.  Windsor then sued Lloyds for breach of contract and breach of the implied covenant of good faith and fair dealing.  The trial court granted Lloyd’s motion for summary judgment and Windsor appealed.

The policy’s insuring agreement covered “Malicious Product Tampering” to an “Insured Product.”  “Insured Products” was defined as “all products including their ingredients and components once incorporated therein of the Insured that are in production or have been manufactured, packaged or distributed by or to the order of the Insured… .”  Windsor argued that the frozen food products containing the contaminated beef qualified as an “Insured Product” because the beef was incorporated into Windsor’s final product.  The court disagreed, finding no ambiguity and that the plain meaning of the policy required Windsor to prove “there was contamination or tampering with its product during or after manufacture, not before Windsor began the process.”

The decision highlights the distinction between contamination products insurance and recall insurance.  The former provides coverage for loss arising out of products contaminated during the insured’s manufacturing process and the latter provides coverage for loss resulting from recalled products regardless of when the alleged contamination to the products occurred.

Property Damage in a Digital Age: Florida District Court Confirms That Coverage for “Property Damage” Excludes Electronic Data

In Carolina Casualty Insurance Co. v. Red Coats, Inc. d/b/a Admiral Security Services, Inc., the U.S. District Court for the Northern District of Florida ruled that the cost to provide free credit protection services to individuals whose confidential medical information was contained on stolen laptop computers did not constitute “property damage” under two commercial general liability insurance policies.

The insured (Red Coats, Inc.), a full-service contract management company that provides security, janitorial and alarm services, entered into a contract with AvMed, Inc., a provider of health coverage plans to members and subscribers throughout Florida, to provide security services at AvMed’s Gainesville, Florida, facility.  Shortly thereafter, two of AvMed’s laptop computers were stolen from its Gainesville facility.  As HIPAA-protected information was contained on at least one of the stolen laptops, AvMed notified the affected subscribers/members and provided each of them with two years of free credit protection services.

AvMed thereafter filed suit against Red Coats, alleging that one of Red Coats’ security guards committed the subject theft (alleging claims against Red Coats for breach of contract, fraud, negligent hiring, retention and supervision, and vicarious liability).  Red Coats then made claims against each of its five insurers (including two commercial general liability carriers, an employment practices liability carrier, and two crime carriers), all of which denied coverage.  After Red Coats and AvMed settled their dispute, Red Coats’ employment practices liability carrier filed a declaratory judgment action, seeking a decree of no coverage.  In response, Red Coats counterclaimed against each of its insurers.  The parties filed cross-motions for summary judgment, which were decided by the court on April 22, 2014 (the crime carriers resolved prior to the disposition of summary judgment).

The commercial general liability policies defined “property damage,” in pertinent part, as “loss of use of tangible property that is not physically injured.” Notably, those policies specifically excluded from the definition of tangible property “electronic data,” defined as “information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.”

The U.S. District Court for the Northern District of Florida ruled that, with regard to Red Coats’ commercial general liability policies, “the loss of use of the laptops was not the problem – AvMed has a lot of other laptops – the problem was that others could access the HIPAA data.  At best, the only coverage would be [the] cost of getting new laptops; there would be no coverage for the HIPAA information and any other data or programs on them, since they would represent electronic data, which is expressly excluded from coverage.  Simply put, this is not property damage in any ‘man on the street’ definition of the term. . . . [I]t is an economic loss claim which is not covered by the [commercial general liability policies].”  The court also rejected Red Coats’ argument that coverage existed under its employment practices liability policy.

Red Coats has appealed the Northern District’s decision to the Eleventh U.S. Circuit Court of Appeals (with briefing to be completed by November 14, 2014).