While much debate has centered around coverage for construction defects, the parties have at least known where the claims are coming from - a structure is set out to be built, something doesn't go right and repairs need to be made. But in IMG Worldwide, Inc. v. Westchester Fire Ins. Co., No. 11-1594 (N.D. Ohio May 13, 2013), [enhanced version available to lexis.com subscribers], an insurer was saddled with exposure for things that did not go right on a construction project, but not because some windows were installed improperly. While the decision arises in a unique posture, limiting its significance, it may nonetheless give rise to similar claims by insureds in like construction situations.
At issue was coverage for claims arising out of a property development deal that went bad. Co-developers sold underlying Plaintiffs undeveloped properties with the promise that they would be upgraded and developed into high end condominiums. The developers were ultimately unwilling or unable to complete the project. IMG Worldwide, while not a co-developer and having no contractual obligation to actually develop the condominiums, allegedly made representations that it was in partnership with the developers and promised to build a sports center in the development once it was built.
The court concluded that IMG could potentially be liable for damages because it allegedly misrepresented its relationship with the developers in advertising and marketing materials in violation of the Florida Deceptive and Unfair Trade Practices Act.
After its insurers denied coverage, IMG settled with the plaintiffs for $5 million, but not before incurring defense costs of $8 million. IMG's primary insurer then settled for the limits of a policy and a payment of $250,000 toward defense costs. Westchester, IMG's excess insurer, continued to deny coverage, a coverage action ensued and it ended up in a jury trial.
The jury concluded that Westchester was responsible for indemnification in the amount of $3,900,000 as IMG had proven by a preponderance of the evidence that coverage was owed as there was an "occurrence" and "property damage." For various reasons, beyond the scope of the discussion here, the court found that Westchester was not liable for defense costs.
On a post-trial motion for a directed verdict/JNOV, the court turned to the "occurrence" issue. The jury found that there was an "occurrence" that triggered the policies. But what was it? The court agreed with Westchester that, if the occurrence were IMG's knowing and intentional misrepresentation, there could be no coverage. But there was evidence presented to the jury of other possible occurrences. IMG maintained that the "occurrence" was the downturn in the economy. However, the court concluded that there was insufficient evidence of this presented at trial.
The court observed that "[i]f the alleged misrepresentation(s), and the downturn in the economy were the only possible events that could constitute an 'occurrence' under the policy, based on the evidence presented at trial, the Court would have no choice but to grant the Defendant's motion[.]" However, the court concluded that there was evidence presented at trial that supported another event that could have served as the 'occurrence' that triggered coverage in the jurors' minds. Specifically, the jury could have found that the abandonment of the project was the cause of the alleged "property damage" by the Plaintiffs. The court noted that there was no evidence presented at trial, nor any indication in the opinions of the court in the Underlying Action, "that the developers' abandonment of the project, even in the absence of any financial investment by IMG, was anything other than an unintended and unexpected event from IMG's perspective."
Turning to the "property damage" requirement, the court determined that there was adequate support for the jury's conclusion. The condominium units, in their undeveloped state, were in a deplorable condition and could not be rented. "The fact that the damages sought could be considered to be 'economic damages' also fails to preclude coverage under the Westchester policies. Because the policies include coverage for loss of use of tangible property, and do not require an actual injury to the property at issue, economic damages are contemplated under the coverage language."
IMG Worldwide involves a property development deal gone bad -- presumably, in part, for lack of funding and/or economy-based reasons. These are fundamental and inherent risks of property development. What's more, the underlying claims were for violation of a state's Deceptive and Unfair Trade Practices Act. This is far from the stuff of what's intended to be covered under a general liability policy. The posture of the case - post trial motions that involved getting into the minds of jurors - diminishes the case's significance. Nonetheless, if, from an insured's perspective, a property developer's failure to perform is unintended and unexpected, and, hence, an "occurrence," liability policies may find themselves in the midst of another aspect of the all together risky business that is construction.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy J. Maniloff is an attorney in the Philadelphia office of White and Williams, LLP. He concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies. Randy is co-author of "General Liability Insurance Coverage - Key Issues In Every State" (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
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