U.S. District Court Finds that the Factual Origin of an Injury—Not the Theory of Liability—Controls the Coverage Analysis

In Maryland Cas. Co. v. Fla. Atl. Orthopedics, P.L., et al., Case No. 10-CV-80203, 2011 WL 1085184 (S.D. Fla. Feb. 24, 2011), a woman underwent surgery at an ambulatory surgical center.  Shortly after surgery, the woman became unresponsive.  Paramedics arrived and transported the woman to the hospital.  In transporting the woman from the ambulatory center, which was on the second floor, the EMT’s were required to take her down the stairs because the elevator was too small for a stretcher.  The woman died at the hospital a few days later.  The estate and survivors commenced a lawsuit against the ambulatory center for medical negligence, negligent hiring, and premises liability. 

Maryland Casualty sought a declaration that it had no duty to defend or indemnify the ambulatory center based on exclusions for claims “arising out of” services furnished by health care providers and for professional services.  The defendants argued that the premises liability count was not excluded because it was unrelated to the underlying allegations of negligent medical care and treatment.  Specifically, they argued that the inadequate physical dimensions of the elevator did not implicate the  requirements in the exclusions that the injury arise out of medical, surgical, or health treatment.

In granting summary judgment in favor of Maryland Casualty, the court said that the medical negligence and negligent hiring claims were excluded because “[h]iring medical staff and implementing appropriate emergency procedures is an intricate part of the provision of medical services, which is excluded from coverage under the policy.”  In regards to the premises liability count, the court noted that the count incorporated all of the other counts for medical negligence and also alleged that the woman incurred complications from “an elective surgical procedure …  ultimately causing her death.”  Moreover, the court held that “the transportation of patients in the case of an emergency is undoubtedly an integral part of the provision of medical services, particularly when those medical services include surgery.”  It went on to hold that the defendants cannot separate the surgery and the act of transporting someone to the hospital because of complications that occurred during the surgery.  In conclusion, the court found that the alleged factual origin of the injury was medical malpractice during surgery.  Accordingly, although an insurer “would have a duty to defend an ordinary premises liability claim,” it has no such duty “when the alleged factual origin of the bodily injury was something otherwise excluded under the policy.”

It is noteworthy that the court did not merely focus on the factual allegations in the premises liability count.  On the surface, allegations that an injured person was harmed because an elevator was too small to effectively transport the person to a hospital for treatment are allegations that would be covered under most standard CGL policies.  The court here, however, ruled that the injuries arose out of medical or surgical treatment and noted that the theory of liability in the complaint cannot transform uncovered damages into covered claims. 

Practice Note

Even though a claimant can assert theories of liability that would seemingly trigger coverage under a CGL policy, it is not the label assigned to the claim that matters, but the factual allegations regarding the origin of the injury.  Insurers and counsel should check exclusions diligently for words and phrases such as “arising out of” or “because of,” which may indicate that the origin of an injury is the focal point. 

By: Todd Davis

U.S. District Court Holds that “Performing Operation” type Pollution Exclusion Did Not Exclude Coverage for Chinese Drywall

In Auto-Owners Ins. Co. v. Am. Building Materials, Inc., Case No. 8:10-CV-313-T-24-AEP (M.D. Fla. May 17, 2011), the court found coverage under a CGL policy for an insured material supplier accused of supplying a builder with Chinese drywall because none of the policy’s exclusions applied.  Notably, the court held that the policy’s pollution exclusion did not apply because it only excluded coverage for ongoing operations, whereas the claim involved  completed operations. 

Auto-Owners Insurance Company (“Auto Owners”) issued a CGL policy to American Building Materials, Inc. (“American Materials”) as the named insured.  KB Home Tampa, LLC (“KB Home”) constructed several homes throughout Florida and hired American Materials as a subcontractor to supply drywall for the homes.  The drywall that American Materials supplied was allegedly defective.  Based on the installation of the defective drywall, the Florida homeowners made claims against KB Home for property damages, who in turn filed a lawsuit against American Materials seeking to recover damages it suffered from the defective drywall.[1]  KB Home also submitted a claim to American Materials’ insurer under the policy. 

Auto Owners commenced a declaratory action in the United States District Court for the Middle District of Florida against its insured and KB Home for a declaration that it owed no coverage to its insured against the claims in the underlying lawsuit.  Auto Owners relied primarily on the policy’s pollution exclusion, which excluded “‘[B]odily injury’ or ‘property damage’ arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration release or escape of pollutants. . . .”  Notably, the court focused on subsection (d), which stated “at or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations. . . .”  The court held that the present tense of the word “performing” indicated an intent to exclude coverage for claims made “at the time the work is being performed.”  The court noted that there is no dispute that the “operations” of American Material, as a material supplier, “were complete at the time the materials were delivered.”  Accordingly, the pollution exclusion did not apply.

Likewise, the court held that exclusion “n” did not apply.  Exclusion n. excludes coverage for “any loss, cost or expense incurred . . . for loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of” an insured’s product, work or impaired property if such product, work or property is “withdrawn from use by any person or organization because of a known . . . defect, deficiency, inadequacy or dangerous condition in it.”  The court noted that this exclusion, also named the “sistership” exclusion applied to limit the insurer’s exposure in cases where similar products are withdrawn from use to prevent failure of similar products. Id. at 10 (citing Honeycomb Sys., Inc. v. Admiral Ins. Co., 567 F.Supp. 1400, 1406 (D. Me. 1983)).  The court held that this exclusion did not apply because there was no allegation that Chinese drywall has been recalled. 

Finally, the court held that exclusion 2.k. did not apply because drywall was no longer “your product” once it was installed.  Exclusion 2.k excludes coverage for “‘[p]roperty damage’ to ‘your product’ arising out of it or any part of it.”   The court held that the drywall could not have been considered “your product” because the “property damage” did not occur until after the drywall was installed and, therefore, the drywall had become real property under Florida law. 

There are several lessons to take away from this case.  Notably, the court’s decision focused on a pollution exclusion that only applies to ongoing operations.  Many CGL policies, unlike the policy here, include language that encompasses ongoing and completed operations.  Those policies might include language such as: “have performed or are performing operations . . . .”[2] or may simply exclude bodily injuries or property damage stemming from pollutants without qualifying language of when it occurred.[3]  Policies with language such as this will not likely be affected by the ruling in American Building Materials.    

The most disturbing portion of this opinion, however, is the court’s determination that the drywall became “real property” once it was installed and, therefore, was not within the definition of “your product.”  The court’s erroneous reasoning opens the door to a slippery slope of faulty analysis.  The exclusion applies to exclude coverage for unsuitable materials and their defective nature. See David L. Leitner, Law and Practice of Ins. Coverage Lit., The Product Exclusion, § 45:13 (2010).  In most construction situations, whether materials are unsuitable will not be determined until after the materials are installed.  Thus, the “your product” exclusion becomes irrelevant for situations where installed products cause damage.  Our research shows that no Florida court has ever held that products become real property once installed.[4]  Further, this holding may have implications for other “business risk” exclusions that use the term “your product” where the products have already been installed. 

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[1] The underlying case is styled KB Home Tampa, LLC v. Am. Building Materials, Inc., Case No. 10-CA-1432 and is pending in the Thirteenth Judicial Circuity in Hillsborough County, Florida.  Notably, this is not the multi-district litigation and the court here specifically held that it makes no finding on the duty to defend or indemnify based on the multi-district litigation or any litigation other than the Florida state-court case. 

[2] Such as CGL 103 (11/05) under exclusion “Pollution,” 1.d., which essentially provides that “bodily injury” or “property damage” arising out of exposure to pollutants are excluded:

d.     At or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf have performed or are performing operations if the “pollutants” are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor; or . . . .

[3] Such as the “Total Pollution Exclusion Endorsement,” which provides:

               This insurance does not apply to: 

               f.             Pollution

(1)  “Bodily injury” or “property damage” which would not have occurred in whole or in part but for the actual alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.

[4] This is underscored by the court’s lack of citation to any other decisions.