The following hypothetical is a variation on a case recently halfway decided.  The facts have been simplified, but the main point is set forth, more or less. This is about first-party insurance–property insurance.

The tale begins with an insured owning two buildings A & B.  In the springtime there were two hail storms about two weeks apart, S1 and S2.  Both buildings were pretty badly damaged. The owner of the two buildings was insured.  In this tale, there was no issue about coverage.  In theory, at least, all the damages were covered.  The insuring agreement applied and the exclusions did not.  No conditions were said to have been violated.

It had primary coverage for $5M in property damage per occurrence.  In addition, the insured had excess coverage to cover his losses when the primary was exhausted.  The primary carrier was considered to have been exhausted for a given occurrence when its policy limits were reached for that occurrence.

The insured also had excess property insurance.  As is customary with property insurance, as well as liability insurance, i.e., 3rd party insurance, the excess insurer has no significant duties to the insured until the policies issued by the primary carrier have been exhausted.  This tale concerns exhaustion; this is true both for the primary carrier and the excess carrier.

The issues revolved around how the two storms–S1 & S2–damaged the two buildings–A & B.  There are several choices: S1 damaged A, and not B.  S1, and only S1, caused damage to both A & B.  S1 was the only cause of damage to A and caused only part of it to  B.  There are a lot of combinations.  One would expect that the excess would not owe anything until the primary carrier has exhausted its coverage on at least one building, say A.  It would own nothing on the building where the primary had not exhausted its coverage, say B.  That could happen in two ways.  S1 did all the damage so that the primary owed nothing, or S2 did some damages to B, but enough to exhaust the primary coverage. 

If there was litigation arising out of these facts, as they’re almost certainly would be, the insured would almost certainly try to prove that S1 and S2 damaged both A and B or at least one of the two, thereby triggering a right to payment from both coverage parts of the primary policy.  (Remember that there are separate limits for different occurrences.)

The primary carrier would try to attribute all causation of the property damage to both A and B to one of the storms.  It would not matter which one. If this is true, then only one of the primary policy parts regarding occurrences, and only its limits, would be triggered.  If S1 and S2 were both triggered but only one-occurrence part of one policy was exhausted,  then the primary would have to pay more than the one-occurrence limits.  The second-occurrence limit might be exhausted too.

The excess carrier would try to favor the S1 and S2  view since that combination would at least suggest that perhaps only one limit would be reached.  The best result would be that S1 and S2 caused property damage to both buildings, assuming that this combination would bring both sets of damages in under $5M.

Of course, both carriers would have to avoid absurd positions and rather unreasonable positions, partly out of fear of being endangered by a plausible bad faith claim brought by the insured, and probably out of a sense of professional honor.  One should keep in mind that from the point of view of the underwriting department of a large insurer, the amount of damages at stake here does not make this a really large case if the insured’s estimate of damages is reasonable.In addition, it is not unlikely that there will be an array of experts: construction, physical injury to tangible property, weather, accountants, and so forth.  Probably each participant will have its own experts, and it is likely they will have different opinions and they may emphasize different facts, or–at least–emphasize the same fact difference.  The kind, the level, and the quality of their educations and expertise will also differ.  All of the opinions may conflict with the views of the insured and other witnesses.

(Notice that I just used the phrase “injury to tangible” property.  This is not the standard usage.  Mostly the term “injury” is restricted to bodily injury, while “damage” is restricted to property damage.  This is the way the two phrases are defined and used in standard policies.  The property side of this distinction is especially confusing since “damage[s]'” is the term usually sought in  civil litigation.)

In any case, this is the kind of case which, in civil ligation, is almost never subject to summary judgment, at least generally speaking.  Of course, this is true even if the views of some witnesses are likely false and that of other witnesses likely true.

If there is a problem of lost profits or lost rents, there will also be what used to be (and still often is) called  “business interruption coverage”.  If this happens there will be even more experts.  Of course, most civil cases are wisely settled, when there is a genuine dispute of facts and reasonable insureds and insurers.

Now, the tale just laid out above is a variation based on United States Fire Insurance Company v.  The Lind Co. v. RSUI Indemnity Company, ___S.W.3d___ (San Antonio, April 25, 2012).  In the Lynn case, there were more details; the facts work a little differently; at least one of the expert witnesses was subjected to severe criticism, and it was two different sets of apartment buildings at issue.

Since the decision of the court of appeals, no further legal events appear to have already happened.   The issues before the district court and the appellate court pertained to summary judgments.    One is surprised that the district court granted them, and one is not surprised at all by what the court of appeals decided or how it reasoned.  If the tale is really similar to the actual case, one would hope that the appellate dispute is over for now.  It is unlikely the court of appeals will grant rehearing, and if it does the result will probably not change.  Furthermore, it seems virtually certain that the Supreme Court of Texas will not take this case. 

Then again, I’m committed to the philosophies that: (1) One wins some, and loses the rest.  (The only interesting question being:  How large is the “some.” )  and (2) Some mistakes are invaluable.  (The only questions being:  “How many is too many”. And, “How does one rate valuable down to–and then stop at–permissible mistakes.” 

Originally posted on 05/24/2012 @ 9:26 pm

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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