Sixth Circuit: Growing Marijuana is Not the Same as Buying a Houseplant or Entertaining Visitors

Posted on February 26, 2015 by Dick Bennett

Half of the states in this country have now legalized marijuana for medical use, and that has led to a number of small-scale growing operations in policyholders’ homes. While not nearly as dangerous as cooking meth on the kitchen stove, such activities can nonetheless pose unacceptable risks of loss. On Tuesday in Nationwide Mut. Fire Ins. Co. v. McDermott, 2015 WL 756206, 2015 U.S. App. LEXIS 3012 (6th Cir., Feb. 24, 2015), a unanimous panel of the Court of Appeals roundly rejected policyholder arguments that starting up such an operation did not represent a change in use or occupancy that the insured was required to bring to the insurer’s attention.

shutterstock_114904339 In 2005, Kasey McDermott purchased a home in Bay City, Michigan and secured homeowner’s coverage from Nationwide. Five years later in 2010, her then-husband Brien Matthews became a licensed medical marijuana patient and caregiver pursuant to Michigan law, and he set up a marijuana growing and processing operation in two rooms in the basement. The area was previously used only for storage and for the couple’s washer and dryer. By January of 2012, Matthews was servicing the needs of four patients, including himself.

Matthews employed a process known as butane extraction to produce a smokable substance called “honey oil.” Honey oil is rich in tetrahydrocannabinol or THC, the principal active ingredient in the plant. It sells for four to eight times as much as raw marijuana. Butane extraction involved drawing liquid butane – a highly flammable chemical – through chopped marijuana leaves to extract the THC. Read more ›

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Tagged with: Butane Extraction, Marijuana, Michigan
Posted in Co-Insureds, Fire, Increase in Hazard

Florida Court Holds Arson is a Type of Excluded Vandalism and Malicious Mischief

Posted on February 25, 2015 by Dick Bennett

shutterstock_112847098 Earlier this month a unanimous Florida appellate court joined a number of other states that have held that an all-risk policy exclusion for vandalism and malicious mischief operates to bar coverage for an arson loss. The opinion can be found at Botee v. Southern Fid. Ins. Co., 2015 WL 477836, 2015 Fla. App. LEXIS 1566 (Fla.Dist.Ct.App., Feb. 6, 2015).

The insured, Raziya Botee, owned a single-family home that was destroyed by an arsonist on October 10, 2012. It was undisputed that the structure had been vacant for over a month when the fire broke out. Her homeowner’s insurer, Southern Fidelity (SFIC), denied liability because the contract of insurance excluded coverage for losses caused by “vandalism and malicious mischief, theft or attempted theft” if the dwelling had been vacant or unoccupied for more than thirty consecutive days immediately before the loss. Ms. Botee responded by filing a declaratory judgment action against the carrier. The trial granted summary judgment to SFIC, and an appeal followed.

The policyholder argued that the contract of insurance was ambiguous. SFIC’s policy afforded all-risk coverage for loss to the structure under Coverage A and named perils coverage for loss to the contents under Coverage C. The vandalism and malicious mischief exclusion was found only in the former, and the latter expressly recited that both “fire or lightning” and “vandalism or malicious mischief” were covered causes of loss. Though the fire had resulted in no contents loss, Ms. Botee looked to the fact that the policy identified both fire and vandalism as “separate covered perils” without defining either one. According to the insured: Read more ›

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Tagged with: Florida, Vandalism and Malicious Mischief
Posted in All Risk, Ambiguity, Arson, Exclusions, Fire, Vacancy and Unoccupancy, Vandalism

California: Service of Suit Endorsement Trumps Forum Selection Clause in Case Involving Product Recall Due to Contamination.

Posted on February 24, 2015 by Joann Selleck

On February 5th in a case involving the recall of over $500,000 worth of oyster products made from Korean shellfish, the Southern District of California held: (1) that the policy’s service of suit clause, which gave the insured the choice of forum, trumped a forum selection clause that provided for suit in a New York state court; (2) that California law, as opposed to New York law, applied, and (3) that for purposes of a 12(b)(6) motion, plaintiff’s complaint, which alleged potential contamination, was sufficient to state a claim. The decision is Tri-Union Seafoods, LLC v. Starr Surplus Lines Ins. Co., 2015 WL 728477, 2015 U.S. Dist. LEXIS 23441 (S.D.Cal., Feb. 5, 2015).

shutterstock_105419966 The case arose after Tri-Union Seafoods initiated a recall in response to the U.S. Food and Drug Administration (FDA) warning about potential contamination. The policyholder’s claim was denied by its product contamination carrier, Starr Surplus Lines, and Tri-Union then filed suit in federal court in California, where it was headquartered and incorporated. Starr’s response was a motion to dismiss based on the contract of insurance’s forum selection clause and/or to transfer to New York pursuant to 28 U.S.C. § 1404(a).

The body of the insurance contract included a forum selection clause establishing New York as the proper forum and source of applicable law. New York was Starr’s principal place of business. Importantly, New York law does not recognize either a cause of action for the tort of breach of the covenant of good faith and fair dealing or an action based on unfair competition, as alleged by Tri-Union under California Business and Professions Code section 17200, et. seq. Starr argued that the service of suit endorsement was not inconsistent with the policy’s forum selection clause and that the two provisions should be read in conjunction with one another. Contrary to Starr’s argument, however, Judge Michael M. Anello held that the service of suit clause modified the policy to permit plaintiff to choose a forum in which to file suit. He noted that the fact that Starr reserved the right to seek removal or transfer of the case to a different forum after plaintiff filed suit in its chosen forum did not alter or change Tri-Union’s ability to select the forum in the first place. Read more ›

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Tagged with: California, Conflicts of Law, Forum Selection, New York, Service of Suit, Unfair Competition
Posted in Bad Faith, Contamination, Contamination and Product Recall

Inventory Computation Exclusion Bars Employee Theft Claim in Alabama

Posted on February 6, 2015 by Dick Bennett

Employee theft claims are frequently problematic when the only evidence of shortage is a comparison between computer records and a physical inventory conducted after the malefactor has been discharged. In W.L. Petrey Wholesale Co. v. Great American Ins. Co., 2015 WL 404523, 2015 U.S. Dist. LEXIS 10943 (N.D.Ala., Jan. 30, 2015), an Alabama federal court recently granted summary judgment to the carrier where the contract of insurance barred employee dishonesty claims based solely on “inventory computation” and such a comparison was the policyholder’s only evidence of the loss.

shutterstock_200562473 Petrey was a wholesale distributor of goods supplied to convenience stores, one of which was a two ounce “energy shot” drink called “5-Hour Energy.” It hired salespeople for delivery routes, and each of them leased a Petrey storage unit. The salespeople ordered inventory from Petrey’s warehouse, and the insured then delivered the goods to the storage unit for distribution.

Justin Bree was a Petrey salesperson for six years before being terminated, and the insured made claim under its business income and crime prevention policy when a post-termination inventory showed a shortage of 82,510 bottles of 5-Hour Energy valued at $111,415.35. The policy covered employee dishonesty, defined as “loss of, and loss from the damage to . . . property resulting directly from dishonest acts committed by an employee, whether identified or not, acting alone or in collusion with other persons[.]” There was also an exclusion for loss “the proof of which as to its existence or amount is dependent upon . . . an inventory computation; or . . . a profit and loss computation,” however, and Great American denied because the claim was based solely on a comparison between Petrey’s computer-generated inventory records and the physical inventory of Bree’s storage unit that was conducted after he was let go. Litigation followed. Read more ›

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Tagged with: Alabama, Employee Dishonesty, Inventory Computation
Posted in Conditions, Exclusions, Theft or Dishonesty

Virginia Court Nixes Claim Chinese Drywall Damage to HVAC Systems is Covered as Equipment Breakdown

Posted on February 5, 2015 by Dick Bennett

In Travco Ins. Co. v. Ward, 284 Va. 547, 736 S.E.2d 321 (2012), the Virginia Supreme Court held that loss occasioned by the sulfuric gas released by defective Chinese drywall was excluded under the primary coverage grant of a property policy because of exclusions for corrosion and pollution. Last month, a Virginia federal court shut down claims that such a loss might nonetheless be covered under a policy’s secondary coverage provisions extending coverage to equipment breakdown. The matter was Nationwide Mut. Ins. Co. v. CG Stony Point Townhomes, LLC, 2015 WL 236826, 2015 U.S. Dist. LEXIS 5682 (E.D.Va., Jan. 15, 2015).

shutterstock_128300597 The policyholder made claim after the heating, ventilating, and air-conditioning (HVAC) systems in five townhouses at its Creek’s Edge at Stoney Point Townhomes complex in Richmond broke down due to off-gassing from the drywall. Its property insurance carrier, Nationwide Mutual, responded by filing a declaratory judgment action asking the court to hold that it had no obligation to cover the claims. Stony Point conceded that it had no coverage under the main body of the contract of insurance in the wake of Travco, but it contended that the damage to the HVAC units was covered by an Additional Coverage for “Equipment Breakdown.” This recited that Nationwide “will pay for loss caused by or resulting from an ‘accident’ to ‘covered equipment.’ “ The provision also afforded coverage for “the additional cost to repair or replace Covered Property because of contamination by a ‘hazardous substance.’ “ Read more ›

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Tagged with: Chinese Drywall, Equipment Breakdown, Hazardous Substances, Virginia
Posted in Contamination, Corrosion, Mechanical Breakdown, Pollution

Late Notice Held to Bar a $6,000,000 Hurricane Wilma Claim in Florida

Posted on January 29, 2015 by Dick Bennett

shutterstock_178930271 In The Yacht Club on the Intracoastal Condo. Ass’n. v. Lexington Ins. Co., – Fed.Appx. –, 2015 WL 106862, 2015 U.S. App. LEXIS 293 (11h Cir., Jan. 8, 2015), a unanimous panel of the Eleventh Circuit recently held that a Florida condominium association’s multi-million claim for extensive Hurricane Wilma damage was barred because the insured failed to give notice of loss for fully 55 months. The policyholder’s arguments that it was initially unaware that the damage exceeded the deductible and that it had created an issue of fact with respect to whether the presumption of prejudice had been rebutted because both parties were ultimately able to put up expert evidence of causation were unavailing.

The Yacht Club had 380 units in some 16 buildings, and its property was damaged by Hurricane Wilma on October 24, 2005. It had a $5,000,000 property policy with Lexington, but the Club’s board was initially of the opinion that the repairs would not exceed the policy’s $100,000 deductible and decided not to make a claim, though they subsequently imposed a $150,000 special assessment on residents to pay for the hurricane damage. Over the next year, however, residents complained of a host of problems with roofs, stucco siding, windows, and sliding glass doors, and that led the Club to hire an engineer in late 2006; his report attributed the roof damage to Wilma.

In late 2009, the Club finally secured a public adjuster, and he advised that the property had suffered significant damage from the storm and recommended making an insurance claim. Formal notice of loss was duly sent to Lexington on July 27, 2010, four years and seven months after the hurricane, and suit was filed three months later. The Club sought $6,208,910 from its insurer. Read more ›

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Tagged with: Florida
Posted in Conditions, Hurricane, Hurricane Wilma, Investigation, Notice, Prejudice

If You Post It, Your Opponent Can Probably Discover It

Posted on January 26, 2015 by Dick Bennett

In March we ran a post on how important videos, photographs, and statements on social media sites can be when investigating a property loss. A picture is literally worth a thousand words. Earlier this month, a Florida court explained that such material is also discoverable – even in situations where the policyholder employs privacy settings that prevent the general public from having access to his or her account – because the user’s privacy interest in such a site is “minimal, if any.” Nucci v. Target Corp., – So.3d –, 2015 WL 71726, 2015 Fla. App. LEXIS 153 (Fla.Dist.Ct.App., Jan. 7, 2015) involved a slip-and-fall, but it applies with equal force to discovery in a first-party matter.

Maria Nucci filed a personal injury action against Target, alleging that she fell on “a foreign substance” on the floor of one of the defendant’s stores. Her complaint contended that she sustained permanent injuries, aggravated pre-existing ones, and also experienced lost earnings and emotional pain and suffering. Prior to her deposition, Target’s attorneys reviewed her Facebook profile and found that it contained 1,285 photographs. She was questioned about some of them at the deposition itself, and she promptly took three dozen of the pictures down.

Target moved to compel. After a hearing, the trial court ordered production of “copies or screenshots of all photographs associated with” any social networking account that Ms. Nucci was currently registered with from two years prior to the date of loss until the present. The plaintiff then sought certiorari review from Florida’s intermediate level appellate court. Read more ›

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Tagged with: Facebook, Florida, Privacy, Social Media
Posted in Discovery, Investigation, Reasonable Expectations

Anti-Sequential Causation Clause Upheld in Hurricane Irene Case in New Jersey

Posted on January 23, 2015 by Dick Bennett

In Ashrit Realty, LLC v. Tower National Ins. Co., 2015 WL 248490, 2015 N.J. Super. Unpub. LEXIS 107 (N.J.Super.Ct., App.Div., Jan. 20, 2015), New Jersey’s Appellate Division held that an anti-concurrent/anti-sequential causation clause precluded coverage for a Hurricane Irene loss. A covered peril (hidden decay) led to an excluded peril (soil erosion), bringing down part of the insured’s structure. As the court explained, such a provision “excludes coverage in situations where a covered event and an excluded event contribute, concurrently or sequentially, to a single loss.” While the New Jersey Supreme Court has yet to weigh in on anti-concurrent/anti-sequential causation clauses, the case adds to growing body of lower court decisions holding or suggesting that such provisions are valid and enforceable. See Assurance Co. of Am., Inc. v. Jay-Mar, Inc., 38 F.Supp.2d 349 (D.N.J. 1999); Simonetti v. Selective Ins. Co., 372 N.J.Super. 421 (N.J.App.Div. 2004); Petrick v. State Farm Fire and Cas. Co., 2010 WL 3257894, 2010 N.J. Super. Unpub. LEXIS 1964 (N.J.Super.Ct., App.Div. 2010).

The policyholders owned a gas station and convenience store in Cherry Hill, New Jersey. The structure experienced moderate damage during a storm on August 14, 2011. Two weeks later on August 28th, the rear portion of the building collapsed during Hurricane Irene. There was a 72” corrugated metal culvert running underground near the rear of the structure, and this was corroded and decayed. Experts for both sides agreed that the deteriorated culvert sustained damage during the first storm and then partially collapsed after Irene, leading to extensive soil erosion; when the insurer’s expert examined the property two days after the storm, there was a hole 60’ long, 20’ wide, and 8’ deep behind the building.

The insureds made claim against their property insurance carrier, Tower National Insurance Company, and they filed suit for breach of contract and breach of the duty of good faith after the insurer denied liability. Tower moved for summary judgment, and that was granted by the trial court in October of 2013. Last week, an appellate panel (Judges Marie Cimonelli and Michael A. Guadagno) affirmed. Read more ›

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Tagged with: Anti-Sequential Causation, New Jersey
Posted in Anti-Concurrent Causation, Causation, Collapse, Hurricane, Hurricane Irene, Seepage or Leakage

Website Names the Top Ten Most Ridiculous Lawsuits of 2014

Posted on December 30, 2014 by Dick Bennett

December saw two posts about the depressing demise of TRIA, so we thought we’d end the year on a considerably lighter note. FacesOfLawsuitAbuse.org is a U.S. Chamber of Commerce project that addresses this country’s litigation explosion, and it publishes a list of the ten most ridiculous lawsuits at the end of every year. While none of this year’s finalists involve insurance coverage per se, we thought that we still would share them with our readership. Some of last year’s – such as the man who sued Apple because he allegedly became addicted to pornography after “accidently” visiting an adult website on an Apple device or the criminal who sued eight brewers for not warning him that alcohol, which supposedly led to his life of crime, was “habit forming and addictive” – were arguably funnier. This year’s crop nonetheless contains some howlers. Read on – and may each and every one of you have a happy, healthy, and prosperous 2015!

shutterstock_167204078 (1) A man who fell asleep during Red Sox game at Yankee Stadium filed a lawsuit against ESPN and its announcers as well as Major League Baseball and the Yankees after he was shown napping on a live telecast of the game. According to his complaint, he suffered “substantial injury” to his “character and reputation” and “mental anguish, loss of future income and loss of earning capacity” as a result of the incident. His complaint seeks $10 million in damages.

(2) Walt Disney Corporation’s new blockbuster movie Frozen, which is based on the Hans Christian Anderson fairytale The Snow Queen, has become the highest grossing animated film in history. Disney has now been hit with a copyright infringement lawsuit by a woman who contends that the story is instead based on her autobiography about growing up in the mountains of Peru. The pro se complaint points to the similarities such as the fact that the plaintiff, like the movie’s Elsa, grew up with a sister with different colored hair. The complaint contends that the film caused “irreparable harm” to the plaintiff and calls for Disney to “cease and desist from any and all sales, distribution and marketing of Frozen in any media format” and to pay her $250 million in damages. Read more ›

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Posted in U.S. Legal System

Minnesota Holds “Comparable Material and Quality” Requires Wholesale Replacement Where Undamaged Siding Is Faded

Posted on December 23, 2014 by Dick Bennett

shutterstock_55811626

Matching issues are frequently problematic when storms damage only portions of an insured structure’s exterior and it proves impossible to replace the damaged sections with material that is an exact match for the rest of the building’s roof or siding. Earlier this month, the Minnesota Supreme Court held that the phrase “comparable material and quality” means material that is suitable for matching; with respect to color, a reasonable match – not an identical match – is all that is required. In Cedar Bluff Townhome Condominium Ass’n. v. American Family Mut. Ins. Co., – N.W.2d – , 2014 WL 7156914, 2014 Minn. LEXIS 661 (Minn., Dec. 17, 2014), however, the court held that that meant that all of the siding on 20 buildings had to be replaced to avoid a color mismatch even though less than 2% of it had actually sustained hail damage.

The insured, Cedar Bluff Townhome Condominium Association, owned a residential complex that sustained hail damage in October of 2011. There was at least some siding damage to each building. The siding panels were 15 square feet in size, and between one and ten panels were damaged on each structure. Overall, however, less than 2% of the siding in the complex as a whole had actually been damaged by hail.

The policy issued by American Family Mutual Insurance Company afforded coverage for “direct physical loss of or damage to Covered Property,” and there was a Loss Payment clause that obligated the carrier to pay “the cost of repairing or replacing the lost or damaged property.” The contract of insurance was also written on a replacement cost basis, and it recited that replacement cost was determined based on the cost to replace the lost or damaged property with other property “of comparable material and quality.” The siding was 11 years old, and the color of the panels had faded. The manufacturer had replacement panels that were identical in model name, size, texture, and installation methodology, but they were not available in a color that matched the faded siding. American Family offered to pay $6,800 to replace those panels that had actually been damaged by hail, but Cedar Bluff sought over $361,000 to replace all of the 20 buildings’ siding. Read more ›

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Tagged with: Comparable Material and Quality, Like Kind and Quality, Minnesota
Posted in Direct Physical Loss or Damage, Hailstorm, Replacement Cost, Valuation