Last week, the Sixth Circuit Court of Appeals affirmed a ruling denying insurance coverage to a homeowner for damages resulting from a fire when a medical-marijuana operation inside the home caught fire.  The case, Nationwide Mut. Fire Ins. Co. v. McDermott (Feb. 24, 2015), revolved around whether coverage for property damage under a homeowner’s policy was properly denied because of the owner’s failure to inform the insurer of her husband’s operation of a medical-marijuana grow and distribution facility inside her home.  The Court answered that question in the affirmative, finding that the policy required the homeowner “to notify [Nationwide] as soon as possible of any change which may affect the premium risk under th[e] policy,” including, but not limited to, “changes … in the occupancy or use of the residence premises.” (emphasis in the original).

According to the homeowner, the policy language was never intended to require her to inform her insurance company of every possible change in the use or occupancy of her home.  The insured argued that, under the insurer’s interpretation, homeowners would be required to notify the insurer anytime they invited guests over to stay at the home, or introduced a new house plant.  The Sixth Circuit didn’t buy this hypothetical: Continue Reading Up in Smoke: Insured Cannot Recover Damages Caused by Fire from Home Medical-Marijuana Operation

Broad and Ineffective “Reservation of Rights” Letter has Big Consequences

Insurers issue reservation of rights letters (“ROR Letters”) to contractors all the time. Typically, a contractor is sued, reports the claim, and one of the first responses from its insurer is an ROR Letter. They are generally long and regurgitate what seems like the entire policy without actually informing the contractor which provisions may actually matter in light of the allegations in the complaint.

The $5 Million ROR Letter

At least one court has held that ROR Letters that fit within this category can have big consequences that benefit insureds put in this unfair position. In Advantage Builders & Exteriors, Inc. v. Mid-Continent Cas. Co. (Mo. 2012), the court awarded $5 million in compensatory and bad-faith damages to a contractor arising from such an ROR Letter. Continue Reading Broad and Ineffective “Reservation of Rights” Letter has Big Consequences

With a new spin on a tired argument, a subcontractor’s insurer denied the duty to defend by relying on “the laws of nature” (read: rain) as evidence that damage allegedly caused by the insured’s defective construction occurred prior to the effective date of the policy. This was an attempt by the insurer to avoid the rule that a duty to defend is determined by reviewing only the complaint and the policy — known as the “eight-corners rule.” The court rejected the insurer’s arguments, holding that they were “inconsistent with Oregon law, and often are looking through the wrong end of the telescope.”

In Seneca Ins. Co. v. James Rivers Ins. Co  (D. Or, July 16, 2014), the subcontractor performed allegedly defective work in a 60-unit condominium in Seaside, Oregon. Continue Reading Yes, it rains in Oregon. But it’s still extrinsic evidence.

Insurance policies almost universally require that the insured immediately report any claim made against the insured. In the context of liability policies written on an “occurrence” basis (generally, policies where coverage is triggered at the time of an accident, no matter when the lawsuit is eventually filed by the plaintiff injured in that accident), late notice to the insurer under Oregon law does not destroy the insurer’s duty to defend and cover a loss unless the late notice somehow prejudiced the insurer. See, e.g., Employers Ins. of Wausau v. Tektronix, Inc. (Or. Ct. App. 2007) (refusing to hold that a 12-year delay was prejudicial).

But a recent California case follows a far stricter rule where the policy was issued on a “claims made and reported” basis, which is how most professional-liability (or “errors and omissions”) policies are written. In Alterra Excess & Surplus Ins. Co. v. Gotama Bldg. Engineers, Inc. (C.D. Cal. July 24, 2014), Gotama, an engineering firm, Continue Reading Failing to Timely Report a “Claim” May Leave Insureds with No Coverage

A Meritorious Claim Can Sting When It Becomes the Basis for Coverage

A recent ruling from the federal court in Oregon highlights the changing world of insurance-policy language and provides a cautionary tale to insureds. In Bennett v. Unites States Liability Ins. Group, (D. Oregon April 25, 2014), the court analyzed several insurance-policy provisions to determine whether an underlying legal claim triggered the insurer’s duty to defend. Janet Bennett, the insured, was sued by her ex-husband for mishandling money that she earned through her business. Bennett reported the claim to her business’s liability insurer to pick up her defense, which was denied. In upholding this denial, Judge Michael Simon found that Bennett’s mishandling of the money (that is, inappropriate billing and mischaracterization of that money) was not a “professional service” as defined under the policy because those activities were not part of the services that she rendered. Rather, those activities were simply the collection of fees for the professional services that she rendered. Continue Reading The “Hornet’s Nest” Exclusion: Don’t Get Stung!