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Insurance Law

Additional and Supplemental Property Insurance Coverages – New Appleman on Insurance Law Library Edition, Chapter 45

By Michael Raibman and Paul Walker-Bright, Attorneys, Reed Smith LLP

This chapter describes the more common coverages that are added to basic property insurance policies.  It further explores how courts have resolved disputes concerning these additional and supplemental coverage provisions.

Section 45.01[1] discusses coverage for debris removal. Property insurance policies reimburse policyholders for the costs and expenses associated with cleaning up and removing debris because damaged property cannot be repaired or replaced until any debris is removed. The necessary costs of removing damaged property are covered, as well as expenses that are necessarily incurred as a result of removal efforts.

Section 45.01[2][a] explains how courts have defined the term "debris," often by resorting to dictionary definitions. In general, the term "debris" has been broadly defined, and courts have allowed a wide variety of expenses incurred in connection with the removal of debris. For example, as discussed in Section 45.01[2][b], the cost of removing pollutants or contaminants can be covered under debris removal provisions in certain circumstances. Section 45.01[2][c] points out that characterizing damaged or destroyed property as debris can affect the determination whether the expenses associated with removing or cleaning up the property are insured.

Section 45.01[3] discusses the fundamental limitation on the scope of debris removal coverage that the debris must have been caused by a covered cause of loss in the first instance. If the cause of the loss is not insured, then the expenses associated with removing debris also will not be insured.  Some policies contain the additional restriction that the debris must be debris of covered property as well.

Another limitation on debris removal coverage is found in Section 45.01[4]. It is common for policies to provide separate sublimits that apply to debris removal coverage, which may restrict the amount of available coverage. It is important to read and understand how a policy applies sublimits in connection with the overall policy limits. Care should be taken to ensure that the limits available for debris removal are adequate to cover the expenses likely to be incurred in the event of damage to covered property.

Section 45.02[1] discusses the policyholder's obligation to protect and preserve property, and the insurer's corresponding duty to reimburse for the reasonable costs of mitigating losses. The purpose of "sue and labor" and similar provisions is both to discourage policyholders from allowing their property to be damaged and to provide incentives to prevent or mitigate losses by ensuring that reasonable prevention and mitigation efforts will be compensated by insurance. Section 45.02[2] examines the split in authority on the effects of a "sue and labor" clause, with some courts holding that a breach of the clause bars all recovery, while others hold that the policyholder may still recover for the loss or damage itself and is precluded only from recovering for any increase in the amount of the loss caused by the policyholder's failure to protect or preserve property.

Section 45.02[3] explains that, as with most property insurance provisions, efforts to protect and preserve property must be undertaken in connection with a covered cause of loss. However, as set forth in Section 45.02[4], such efforts are compensable if the property is in imminent danger of being damaged or destroyed, even though the property ultimately may not be damaged at all. Similarly, protection and preservation efforts need not be successful in order to be insured. Section 45.02[5] discusses the circumstances in which an insurer may be estopped to deny coverage if it insists that the policyholder protect and preserve property pursuant to a sue and labor clause. Section 45.02[6] explains that efforts to protect and preserve property must be reasonable and primarily for the benefit of the insurer; i.e., to prevent or reduce a loss the insurer would be liable to cover. Section 45.02[7] describes the policy language that leads courts to determine that protection and preservation expenses are recoverable even if policy limits are otherwise exhausted. Similarly, policies often are written in such a way as to exempt such expenses from deductibles. Section 45.02[8] discusses what constitutes reasonable efforts to protect and preserve property. Policyholders have the obligation to exercise the care of prudent uninsured owners to protect and preserve property, but this does not require them to use all possible care or follow the wisest course. What constitutes reasonable efforts is highly fact-specific, as are the types of expenses policyholders may incur in protecting and preserving property.

Section 45.03[1] explains why post-loss building costs often are impacted by building codes.  Policy language providing coverage for such increased costs is introduced in Section 45.03[2], which also includes a discussion of the basic requirements of that language.  Section 45.03[3] expands on the issue by exploring the limitation that code coverage pays only for the "minimum" work necessary to comply with code.  This issue often is contentious because code enforcers may require more work than the insurer deems necessary to comply with the code, whereas the policyholder seeks only to repair its building as quickly as possible, without involving the code enforcers.

Another contentious issue is addressed in Section 45.03[4]:  the meaning of "enforcement".  Policyholders generally view this term broadly, understanding it to cover everything from formal, written orders from code officials to code work incorporated into rebuild plans by architects and engineers whose licenses are at risk if they issue non-code compliant plans.  Insurers, however, generally contend that only a formal order from a code official suffices (although in instances in which code work is excluded, insurers often contend that the entire permit process is "enforcement").

Section 45.03[5] addresses whether code coverage applies to undamaged portions of buildings that suffer insured loss.  The short answer is that it depends; the slightly longer answer is that (a) some policies expressly provide such coverage and (b) other policies are silent on the question, which has resulted in conflicting judicial decisions on the issue.

Section 45.04[1] sets forth the basic policy language governing payments for loss assessment expenses and professional fees; that is, the cost of preparing a claim.  This coverage generally does not give rise to significant disputes, with two exceptions.  The first is the scope of exclusions from claim preparation coverage - most notably public adjuster's fees, attorney's fees, and the costs incurred by a policyholder's own employees in preparing a claim - which are addressed in Section 45.04[2].  The other is whether the costs incurred in preparing a claim are reasonable, which is addressed in Section 45.04[3].

Section 45.05 discusses the basics of coverage for charges assessed by fire departments after they fight a fire (or provide a fire watch).  This coverage is not at all controversial, but often has very low limits.

Section 45.06[1] discusses the highly litigated provision that insures property subject to "collapse." There is a split in authority whether the undefined term "collapse" is narrow and limited to circumstances where a building has completely fallen down or flattened to rubble, or whether the term is ambiguous and can reasonably be read to insure damage that materially impairs the basic structure or substantial integrity of a building. Section 45.06[2][a] explains the reasoning of courts that find the term collapse to be unambiguous, and Section 45.06[2][b] explains the reasoning of courts that find the term to be ambiguous. Section 45.06[2][b][i] further analyzes cases discussing policies that do not define "collapse." Section 45.06[2][b][ii] discusses insurers' efforts to counter such decisions and limit coverage by defining "collapse," with mixed results. Many courts continue to hold that even with a definition, the term can be ambiguous and thus cover damage less than a total destruction of a building, as long as that damage results in substantial impairment to the building's structural integrity. Some courts impose the further limitation that a collapse must be "imminent" in order to trigger coverage.

Section 45.06[3][a] discusses the interaction of collapse coverage provisions with other policy terms, conditions and exclusions. Collapse coverage often is included in separate "Additional Coverage" sections, and it is not always clear whether conditions and exclusions in the main body of a policy are intended to apply to collapse coverage. Section 45.06[3][b] explores the interaction between collapse coverage that insures against collapse caused by "hidden decay" and other policy provisions that exclude loss caused by corrosion, decay, deterioration and the like. Exclusions for earth movement and settlement are other provisions that commonly conflict with collapse coverage, as described in Section 45.06[3][c]. Earth movement exclusions typically list natural events such as earthquakes and landslides as excluded causes of loss, leading courts to hold that these exclusions do not exclude damage from man-made collapses, such as those caused by construction activities. Civil authority coverage also can conflict with collapse coverage, because civil authorities often issue orders restricting or preventing occupancy until a damaged building is repaired and rendered fit for use. Section 45.06[3][d] examines the cases that have grappled with this conflict.

Section 45.07[1] explains that most commercial property insurance policies exclude coverage for mold, but that such coverage may be "bought back" by payment of an additional premium.  As explained in Section 45.07[2], however, some courts have held that mold exclusions do not apply if the efficient proximate cause (the "but for") cause of the mold is covered, because in such circumstances the mold is the damage, not the cause of the loss; other courts disagree.  A similar situation is explained in Section 45.07[3], which addresses "ensuing loss" provisions.  Such provisions provide that loss otherwise covered by a policy are covered even if they ensue from an excluded cause, such as water damage or an error in design.  Much litigation has arisen regarding how mold exclusions and ensuing loss clauses interact; courts are somewhat split on the question of whether mold is covered as an ensuing loss where it otherwise is excluded.

Additional coverage is available for flood and water damage. Section 45.08 discusses the various types of water damage that policies can cover or exclude. Section 45.08[2] examines flood insurance. Section 45.08[2][a] describes the ways in which courts have interpreted the term "flood." Generally, a flood is understood to occur when a body of water overflows its normal boundaries due to either natural or man-made causes and inundates an area of land that is usually dry. Section 45.08[2][b] explains that policies distinguish between a "flood" and "surface water." Surface water is water that derives from rain or snow, is diffused over the surface of the ground, does not follow any defined course or gather into or form a natural body of water, and is lost by evaporation, percolation or natural drainage.

Section 45.08[2][c] discusses coverage under policies issued pursuant to the National Flood Insurance Act. Insurance is written on a Standard Flood Insurance Policy, and coverage is limited not only by the terms of this policy form, but also by the statutory provisions and applicable regulations. Section 45.08[2][c][i] sets forth the definition of "flood" in the standard form, and Section 45.08[2][c][ii] describes what property is covered and excluded under the form. Section 45.08[2][c][iii] examines the form policy's distinction between damage caused by "erosion" and "mudslides," which is covered, and damage caused by "landslides" and "other earth movement," which is excluded.

Section 45.08[2] discusses the various coverages and exclusions that are available for water damage. In the most general sense, policies typically insure damage caused by artificial sources of water such as broken pipes, sewers and drains, and typically exclude damage caused by rain, surface water, subsurface water, and flood. Policies can insure or exclude damage caused by sewer or drain back-up as well. The most common issue courts confront in water damage cases is how to characterize the water in question to determine whether the damage is caused by a covered or excluded form of water.

Sections 45.08[2][a] and [b] examines coverage for damage caused by water from plumbing systems, household appliances, or sewers and drains. Courts are called upon to resolve disputes concerning what is a plumbing system, household appliance, or sewer, and they also must decide causation issues when water from covered and uncovered sources causes damage. Section 45.08[2][b][i] discusses water damage from plumbing systems, a term usually broadly construed. Difficult causation issues can arise because the distinction between a plumbing system on the one hand, and a drain or sewer on the other, often is not clear. Section 45.08[2][b][ii] discusses water damage from household appliances, and Section 45.08[2][b][iii] discusses water damage from sewers and drains. Policies can cover or exclude damage caused by water that "backs up" from sewers and drains, and thus courts must decide when a "back up" occurs, and the source of the water in question. Section 45.08[2][c] discusses coverage for damage caused by freezing water, which often turns on whether the insured used best efforts or reasonable diligence to prevent water from freezing in the pipes of vacant or unoccupied property.

Section 45.08[2][d] discusses common exclusions for water damage. The interaction between water damage coverage and exclusions for "surface water" and "flood" is discussed in Section 45.08[2][d][i]. Property damage may be covered or excluded depending on what type of water impacts the property, but the demarcation between surface water, flood, and other types of water can be subtle, and the nature of water can change several times over the course of minutes or hours. Similarly, exclusions for subsurface water and earth movement can raise difficult causation issues. Section 45.08[2][d][ii] describes how courts have resolved the potential conflict between coverage for water damage from plumbing systems and sewers and exclusions for subsurface water by construing the exclusions to apply only to water emanating from outside of the plumbing or sewer system. The subsurface water also must be from natural causes. Section 45.08[2][d][iii] discusses how earth movement exclusions apply in situations where the earth has moved due to water. Generally, if water is the ultimate cause of earth movement, the exclusions will not apply, because they are intended to exclude coverage from damage caused by forces operating within the earth itself, such as earthquakes, volcanic eruptions and landslides.

Section 45.08[2][e] discusses coverage for ensuing water damage. Policies often exclude damage caused by water, but insure water damage that ensues from some other, covered peril. The water damage must be the result of the covered peril rather than the cause of loss in the first instance. A common form of ensuing loss provision excludes damage caused by rain except where rain water enters a building through openings caused by covered perils such as wind or hail.

Section 45.09 discusses additional and supplemental coverage for electronic data. Modern policies exclude loss of or damage to electronic data, and coverage for such loss or damage is available only through special policy forms and endorsements. Coverage is available for the loss of actual electronic data, business interruption and extra expense costs caused by loss of data, the costs of responding to breaches of personal data, cyber-extortion, professional services and media errors and omissions, employee dishonesty, and third parties' cyber-crimes. There is as yet little case law discussing these types of electronic data coverage, which vary greatly from insurer to insurer.

Section 45.10 discusses replacement cost for personal property.  Although policies generally pay out the actual cash value of personal property that is damaged beyond repair by a covered loss, it is possible to purchase so-called replacement cost coverage instead.  Such coverage pays the cost of either repairing the damaged item to its pre-loss state or replacing it with a new item of like kind and quality.

Section 45.11[1] discusses coverage for consequential loss, and provides an example of the type of policy language that may provide such coverage, emphasizing the need to recognize that such coverage is limited to the express "consequences" covered.  In contrast, Section 45.11[2] discusses theories under which more general "consequential loss" may be pursued by policyholders.

Section 45.12[1] discusses the state of terrorism coverage before September 11, 2001.  Section 45.12[2] explores the implementation of terrorism coverage exclusions after the September 11 attacks.  The federal government's response to such exclusions, the U.S. Terrorism Risk Insurance Act ("TRIA"), is discussed in Section 45.12[3], as is the type of insurance available as a result of that statute.  Finally, Section 45.12[4] discusses the availability coverage for acts of terrorism that is not governed by TRIA.

Michael Raibman is a Counsel in the Insurance Recovery Group of Reed Smith LLP.  He is resident in the Washington, DC office and represents policyholders in insurance coverage litigation of all sorts, with a particular emphasis on first-party property and comprehensive general liability coverage.  Mr. Raibman has been a leader or key member of teams that have recovered more than $800 million for policyholders, including several substantial trial verdicts.  He also counsels policyholders with regard to all aspects of insurance coverage, ranging from first-party property and comprehensive general liability to credit insurance, D&O, E&O, employment practices liability, and variety of financial policies.

Paul Walker-Bright is a partner at the law firm of Reed Smith LLP, resident in the firm's Chicago office. Mr. Walker-Bright's practice concentrates on complex insurance recovery and litigation, primarily on behalf of policyholders.

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