Inside This Issue:
• Mold Loss Excluded Under Homeowner’s Policy – Summary Judgment for Carrier
• Personal Injury Case against Engineer Dismissed for Lack of Expert Testimony
• Contractor May be Sued for Lost Profits Arising out of Breach of Contract
Mold Loss Excluded under Homeowner’s Policy –
Summary Judgment for Carrier
A homeowner’s suit against Lexington Insurance Company to recover under a property policy for damages caused by shoddy roofing work that resulted in mold contamination was dismissed based on a coverage exclusion for mold.
The insurance policy covered any risks of loss to the structure unless caused by one of the listed exclusions. It stated that “any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.” One of the listed exclusions was mold. The exclusion was specifically for loss caused by “smog, rust or other corrosion, fungus, mold, wet or dry rot.”
The crux of the dispute concerned the question of whether the coverage for “any ensuing loss to property,” in combination with the mold exclusion, should be read as excluding mold damages only when the losses were directly caused by mold. The homeowner argued that since the loss was caused by shoddy workmanship or vandalism by the contractor which would be a covered loss under the policy, the mold ensuing from that work or vandalism must also be covered. The court held that this position is not supported by the case law of the state. In reviewing case precedents from several other states, the court explained that courts hold that “the ensuing loss provision does not reinsert coverage for excluded losses, but affirms coverage for secondary losses ultimately caused by excluded perils.” In other words, if an uninsured peril causes a secondary loss of the type that is covered by the policy, that secondary loss will be covered only and this does not thereby result in the uninsured primary cause of that insured secondary loss being entitled to coverage under the policy as well. In this case, the court held that mold, and the damage mold caused to the structure, are excluded. Because the court found that claims for damages resulting from mold damage to the structure were not covered, it granted summary judgment in favor of Lexington Insurance Company. Brick v. Lexington Insurance Company, (Superior Court of New Jersey , Docket No. ATL-L-1285-03 ( April 2, 2004 )).
Risk Management Note: This is an important decision in that it reiterates the intent of the insurance company that a mold exclusion is intended to exclude losses arising out of mold, regardless of how that mold was caused. Mold exclusions have routinely become a standard exclusion in most policies, either in the text of the base policy itself or in an endorsement added to the policy by the underwriter. The policy in question was a general liability property policy but the same concerns and exclusions are also seen in contractors’ general liability policies and in the professional liability policies of design professionals.
A wide variety of mold endorsements have been drafted by the Insurance Services Organization (ISO) and numerous insurance companies. Some endorsements may provide mold coverage subject to a sub-limit. Others may provide a higher deductible for mold coverage than for the balance of the policy. There are “bodily injury only” mold endorsements as well as “property damage only” endorsements. And there are endorsements granting mold coverage provided it does not result from improper maintenance or in other cases from faulty workmanship or defective design. Some endorsements may grant mold coverage on certain types of commercial facilities but exclude it on residential facilities. The possibilities are extensive. This is definitely not a situation where one size fits all. By working with its insurance broker and insurance company, the insured may be able to obtain coverage to at least cover some of its risk arising out of mold.
Personal Injury Case against Engineer
Dismissed for Lack of Expert Testimony
Where a pedestrian sued a city and its engineering consultant for negligent design and construction, and failure to warn of a dangerous condition in a sidewalk, a court held that the engineer was entitled to summary judgment. This was because the plaintiff did not present expert testimony on the professional standard of care, and the evidence did not establish a duty of the engineer to warn of a dangerous condition.
In the case of Luther v. City of Winner and Dan Britton, 674 N.W. 2d 339, 2003 WL 23137692 (South Dakota, 2004), the renovations for Main Street that was designed by the city’s engineer included changing the sidewalk and curbs to correct drainage problems caused by the fact that one side of the street was two feet higher than the other. The engineer changed the sidewalks in front of several stores to create a six inch step in the sidewalk, in addition to the curb. As a result of this change, a customer would walk out of a store on a level surface, and after walking about ten feet toward the street, the customer would encounter a sex step down the middle of the sidewalk. After walking another four feet, the customer would reach the street. Unfortunately, one customer, Donald Luther, fell on the step in the middle of the sidewalk and was hurt. He had climbed up the step while going into the store but says he forgot it was there when leaving. Apparently there was no handrail or marking on the step or sidewalk to indicate that there was a step. There was some indication that the step had been painted a bright yellow at one time but that the paint had worn off over the years.
In his case against the engineer, the plaintiff failed to present expert testimony concerning the standard of care that was owed by the engineer. Instead of expert testimony, the plaintiff presented testimony (mostly hearsay) that several other people had fallen in the same area. The court found that expert testimony was required to show what the standard of care was and that the engineer failed to meet the requisite standard. As explained by the court, expert testimony is required if the standard of care is not within the common knowledge of the jury. Only when a layperson would know based on their common knowledge that a professional service was negligent does it become unnecessary to have an expert. An example of such common knowledge of negligence would be where a surgeon cuts off the wrong leg of a patient. On the other hand, says the court, if there was a question whether the surgeon correctly performed a complicated surgery, an expert may be required.
Litigation Comment: This case once again demonstrates the importance in obtaining expert testimony to (1) establish the standard of care and (2) to prove that a design professional failed to meet that standard. In most claims against professional service providers for negligence, the types of questions for consideration by the jury go beyond the kind of common knowledge that a layperson would have as to whether the services were negligently performed. The number of cases like that of a surgeon cutting off a wrong leg being subject to a common knowledge determination of negligence are not nearly as common as the more subtle determinations that typically arise concerning whether a design professional exercised his or her services consistent with the generally accepted standard of care for similar services performed by similar professionals. When filing a suit based on professional negligence, some states require an affidavit by an expert be attached to the complaint. Even where such an affidavit is not required, however, courts may dismiss a case for failure to present expert testimony. Moreover, even when a plaintiff believes the negligence is so obvious that it can be proved by lay testimony to the common knowledge of a lay person, it still may be most prudent to submit expert testimony rather than risk a court finding, as this court did, that the alleged negligence was not within a layperson’s ability to determine without an expert.
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Contractor May be Sued for Lost Profits arising out of Breach of Contract
When an oral surgeon hired a contractor to construct his office and was unable to use part of the finished office due problems with the floors, he sued the contractor for damages, including loss of profits. The court held that the possibility that there would be lost profits if the facility were not open and available for business in time could have been reasonably foreseen at the time the parties entered into the contract and the surgeon was entitled to have a jury determine whether lost profits should be awarded as part of the compensatory damages.
After opening his dental practice, the floors in his office began seeping moisture, becoming slippery, and producing offensive odors. He closed the surgical rooms of his office due to these conditions which were caused by improper ventilation of the concrete slab under the flooring. He sued for lost profits due to lost patients and lost business growth opportunities. The contractor argued that such losses were not included in the measure of damages for breach of a construction contract.
The case law of the state having jurisdiction over this case (Connecticut) supports awarding lost profits as an element of compensatory damages for general breach of contract claims, says the court. Citing the Restatement (Second) of Contracts, the court states that recovery is divided into the components of direct damages and incidental or consequential loss caused by the breach, and goes on to state that traditionally, consequential damages include “any loss that may fairly and reasonably be considered [as] arising naturally, i.e., according to the usual course of things, from such breach of contract itself.” The court quotes previous case law for the proposition that “it is our rule that unless they are too speculative and remote, prospective profits are allowable as an element of damage whenever their loss arises directly from and as a natural consequence of the breach.” Amrogio v. Beaver Road Associates, 267 Conn. 148, 836 A.2d 1183 (2003).
Risk Management Note: This case demonstrates why contractors and design professionals are seeking waivers of consequential damages in their contracts with project owners. Some of the American Institute of Architects (AIA) standard form agreements contain such waivers to protect the contractor against consequential economic damages such as lost profits or lost rents. Project owners that believe such economic damages may be a significant part of their project risks may find it to strike such waivers of consequential damages out of the contracts for that reason. I have attended more than one construction lawyers program where attorneys for project owners have stated that they routinely strike these clauses from contracts.
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This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for environmental and design professional liability. The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law. Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.
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