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May 2018

Philadelphia Partner Michael Cawley Obtains Summary Judgment in Property Damage Coverage Dispute

Gordon Rees Scully Mansukhani Philadelphia partner Michael Cawley won summary judgment on behalf of the firm’s client, an international insurer of property and inland marine risks across the United States.

At issue in the insurance coverage and bad faith litigation instituted by the insured against its property insurer were multiple challenges to the denial of insurance coverage by the insurer of a major property damage claim to the insured’s warehouse and HVAC systems. The warehouse and HVAC systems were damaged when hundreds of wood pallets stored in the warehouse were discovered to be the source of excessive moisture which rusted the interior walls of the warehouse as well as the HVAC systems. Additionally, as a result of the excessive moisture, the HVAC systems became inoperable.  

The insurer denied coverage on the basis of a property damage exclusion contained in the policy which precluded insurance coverage for “loss caused by contamination or deterioration including … rust… that causes it [the covered property] to damage or destroy itself." The insured argued that the exclusion had no applicability to its claim for property coverage since the “damage” sustained to the warehouse and HVAC system was the rust itself. The insured argued that the rust which attacked the HVAC systems and interior walls of the warehouse constituted the “damage” to the covered property (i.e. the walls and HVAC systems) and, as such, the exclusion should not apply to preclude coverage.

No reported cases in Pennsylvania had ever addressed the argument being advanced by the insured to avoid the exclusion for damage caused by rust. On behalf of its insurer client, Gordon & Rees' attorney analyzed the reported opinions issued by courts in other jurisdictions which have considered arguments identical to those being made by the insured in this case. In its Motion for Summary Judgment, Gordon & Rees explained to the court that the “rust” caused the damage to the HVAC systems and the building. In making its argument(s), Gordon & Rees pointed out to the court that none of the insured’s repair estimates sought to “repair” or “restore” or “replace” the “rust”.

To the contrary, the building walls and the HVAC systems were the items the insured’s estimators stated were in need of repair, not the “rust”.  After oral argument and the submission of a Stipulated Set of Facts, the court rejected the insured’s arguments that the rust constituted the damage to the property. It agreed with Gordon & Rees' position that the rust caused the deterioration of both the HVAC systems and walls of the warehouse. The court granted summary judgment in favor of Gordon & Rees' insurer client and entered an order stating that the insurer had no obligation to provide property coverage to the insured.

Additionally, Gordon & Rees raised the “known loss doctrine” as a further defense to coverage. Extensive discovery in the litigation, including depositions of the insureds’ principals, revealed that the insureds' principals were well aware of the damages to the warehouse and HVAC systems prior to the inception of the property policy. Since the damages to the warehouse and HVAC systems had already taken place prior to the inception of the policy, the very purpose of insurance (i.e. to insure against the fortuity of future losses) would be frustrated by allowing the insured to collect for losses that had occurred before the policy incepted. These admissions by the insureds' principals obtained by Gordon & Rees during discovery permitted the court to apply the “known loss doctrine” to the insured’s claim and provided additional support for denying insurance coverage to the insured for the damage to its warehouse and HVAC systems. 

Michael J. Cawley