The Neglect Exclusion Does Not Apply to Pre-Loss Neglect
Posted on August 31, 2016 by admin
Edward Eshoo | Property Insurance Coverage Law Blog | August 29, 2016
Homeowner and commercial property insurance policies typically exclude loss or damage caused by or resulting from neglect.1 Under the ISO Homeowners 3-Special Form,2 neglect means “neglect of an ‘insured’ to use all reasonable means to save and preserve property at and after the time of a loss.” Under the ISO Commercial Property Causes of Loss-Special Form,3 neglect means “neglect of an insured to use all reasonable means to save and preserve property from further damage at and after the time of loss.” As both forms clearly and unambiguously state, the exclusion does not apply to pre-loss neglect. Rather, it applies only to neglect of an insured at and after the time of loss.4
But, what if the purported neglect occurred after an incident which also resulted in a loss? That was the issue raised in Chicago Import, Inc. v. American States Insurance Company. There, a sprinkler at the insured’s warehouse sprayed water, damaging inventory. The Chicago Fire Department was called, who turned off the water supply and replaced the sprinkler. After the sprinkler was replaced, the Chicago Fire Department employees told a Chicago Import employee that “everything was okay” with the sprinkler system. Chicago Import submitted an insurance claim, which American States paid.
Three weeks later, a fire broke out in the warehouse. But, the sprinkler system was off at the time of the fire. American States denied coverage for the fire, asserting that the “neglect” exclusion barred coverage because the damage was caused by Chicago Import’s failure to turn the sprinkler system on after the repairs. Chicago Import denied that it knew the system was off, stating it left such matters to the Chicago Fire Department.5
Both parties moved for summary judgment on applying the neglect exclusion. American States relied on Bass v. Illinois Fair Plan Ass’n,6 in which coverage was not afforded for a third fire because the insured failed to adequately protect the building after two prior fires by not boarding it up. The federal district court in Chicago Import distinguished Bass, stating that the losses there resulted from the same harm (fire), while the losses before it resulted from entirely different harms (water and fire). The district court reasoned that “[i]f a wayward sprinkler head requires an insured to take all reasonable measures to protect against a later fire, the distinction between pre and post-loss neglect is meaningless – once an insured makes a single claim the distinction is forever lost, regardless of the timing of, or dissimilarity between, the losses.”7 Because American State’s complaints were about pre-loss neglect, the district court found that the neglect exclusion did not bar coverage, and granted summary judgment for Chicago Import.
Even if the exclusion applied, the district court in Chicago Import noted that it would have denied both parties’ motions because there were genuine issues of material fact as to (1) whether any employee knew or reasonably should have known that the sprinkler system was off and (2) whether the extent of damage would have been less had the system been on, given the “save and preserve property from further damage” language in the exclusion. On the issue of knowledge, the district court appears to have followed the Tuchman court’s interpretation that “the insured must have knowledge of a readily identifiable, imminent, and real peril, endangering the property.”8
1 The neglect exclusion appears in the 165-line, 1943 New York Standard Fire Policy adopted by many jurisdictions, including Illinois, at lines 21-24: “neglect of the insured to use all reasonable means to save and preserve the property at and after a loss, or when the property is endangered by fire in neighboring premises.”
2 HO 00 03 05 01.
3 CP 10 30 04 02.
4 See Tuchman v. Aetna Cas. & Sur. Co., 55 Cal.App.4th 1607, 52 Cal.Rptr.2d 274 (1996). See also 5 John Alan Appleman & Jean Appleman, Insurance Law and Practice § 3115.
5 The neglect exclusion in the American States policy was worded the same as the ISO Causes of Loss-Special Form’s neglect exclusion.
6 98 Ill.App.3d 549, 424 N.E.2d 908 (1981).
7 Chicago Import, Inc. v. Am. States Ins. Co., 2015 WL 2193138, at *2 (N.D.Ill. Aug. 16, 2016).
8 Tuchman, 55 Cal.App.4th at 1616, 52 Cal.Rptr.2d at 279.
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Jury Awards Import Co. $5M In 2007 Warehouse Fire Coverage Row
Law360, New York (March 15, 2016, 1:37 PM ET) --
An Illinois federal jury on Monday awarded a $5 million verdict in
favor of an import company in its breach of contract suit against
American States Insurance Co. in a dispute over $5 million in coverage
for a 2007 warehouse fire.
After a trial that began on March 7, the jury returned a verdict for Chicago Import Inc. in its suit over a fire that had devastated a rented Chicago warehouse in May 2007. The jury’s reasoning isn’t available as the verdict form isn’t publicly obtainable.
According to Chicago Import’s attorney, Mark Roth of Orum & Roth LLC, American States had argued that either Chicago Import’s owner set the football-field size warehouse on fire or had a representative commit arson.
The insurer also claimed that the importer misrepresented its inventory’s value, Roth told Law360 on Tuesday.
The Bureau of Alcohol Tobacco & Firearms fire investigator was the only investigator who thought the fire was incendiary, Roth said.
“He admitted that after nine years of an investigation ATF did not know who allegedly started the fire,” Roth said.
It took the jury about about 45 minutes to reach their verdict, according to Roth.
“Obviously, we are very pleased with the verdict,” Roth said. “It moved our client to tears.”
The jury also found that Chicago Import did not misrepresent facts to the insurance company, according to Roth.
At the time of the fire, Chicago Import had an American States policy with commercial property coverage limits of $5 million, according to court documents.
Chicago Import filed a proof of loss with the insurer seeking $5 million for inventory losses and debris removal costs, court papers said.
According to Chicago Import, because American States delayed and refused to pay the proof of loss, the policyholder's president had to borrow money and use his personal residence as collateral to cover the company's operating expenses and pay creditors.
Chicago Import filed suit in May 2009 in Illinois federal court, asserting claims for declaratory relief, breach of contract and bad faith.
In May, U.S. District Judge Manish S. Shah tossed Chicago Import's bad faith claim against American States, while ruling that the insurer can't rely on a neglect exclusion to try to bar coverage for the fire.
The judge granted American States summary judgment on Chicago Import's assertion that the insurer's conduct in processing the claim was "vexatious and unreasonable," saying the claim must fail because American States presented sufficient evidence to proceed with its arguments that coverage doesn't exist because Chicago Import committed fraud and arson.
However, American States couldn't argue that coverage is barred under a neglect exclusion because Chicago Import allegedly failed to turn on a sprinkler system after a prior incident with the system, Judge Shah said.
American States had pointed out that a sprinkler head at the warehouse had malfunctioned and damaged inventory three weeks before the fire. The insurer paid the ensuing claim, according to court documents. The fire department replaced the sprinkler head and told Chicago Import that the system was fixed, but when the fire occurred, the system was turned off, court papers said.
Chicago Import denied it knew that the system was off, and said that its duty to protect against further damage "at and after the time of loss" doesn't apply to alleged pre-loss negligence, such as failure to turn on the sprinkler system.
Representatives for American States didn’t immediately respond to requests for comment on Tuesday.
Chicago Import is represented by Mark D. Roth of Orum & Roth LLC.
James W. M arks of James W. Marks PC, William Alan Buzogany of Buzogany & Associates LLC and Michael J. Mueller o fBarnes & Thornburg LLP.
American States is represented by Cheryl L. Mondi, Peter E. Kanaris, David E. Heiss, Nicole M. Gallagher, Christopher Z. Ransel and Jefferson D. Patten of Fisher Kanaris PC.
The case is Chicago Import Inc. v. American States Insurance Co., case number 1:09-cv-02885, in the U.S. District Court for the Northern District of Illinois, Eastern Division.
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Insurer Wants $5M Warehouse Fire Verdict Extinguished
Law360, New York (June 7, 2016, 12:51 PM ET) -- American States Insurance Co. continues to press an Illinois judge to undo a jury’s $5 million award to Chicago Import Inc. after in the insurer denied coverage for a warehouse fire, saying Monday the court erred by barring certain of the insurer’s evidence while letting the importer present speculative opinions.American States has argued since April that U.S. District Judge Manish S. Shah should grant a new trial or reduce the $1.5 million damages award on the grounds that Chicago Import’s expert, forensic engineer Dennis Dyl, based his opinion that electricity couldn’t be ruled out as the cause of the 2007 blaze on speculation rather than on scientific facts.
That sentiment continued Monday, when the insurer contended that Dyl ambushed them at trial by presenting new opinions as to the cause of the fire based on evidence he hadn’t previously examined, while never alerting the insurer that his opinion had changed, leaving them with no opportunity to respond.
The court also wrongly barred evidence related to prior fires and subsequent insurance claims by Chicago Import’s company president, Ashokkumar Punjabi, which should have been admissible to prove motive and lack of accident, the insurer said Monday.
Instead, “American States was prejudiced in that it could not rebut Chicago Import’s arguments that Mr. Punjabi acquired substantial wealth through hard work and was busy building his business, not starting fires,” the insurer wrote.
American States had issued Chicago Import a $5 million commercial property policy that was in effect in May 2007 when a fire devastated a rented Chicago warehouse. The importer filed a claim saying the fire destroyed that much value in inventory losses and debris removal costs, which the insurer denied, and Chicago Import sued. In March, an Illinois federal jury awarded it $5 million.
In April, American States asked for a new trial or altered judgment, but the importer responded last month that the verdict should stay in place, arguing that the insurer was simply rehashing old arguments from its original pre-trial motion to exclude testimony.
“The jury had a vast amount of evidence to support the damages verdict in this case,” the importer had said. “Significantly, American States never objected to the introduction of any of the experts’ opinions placing the value of the damaged merchandise in excess of $5 million, exclusive of tax, duty and freight.”
In the wake of the fire, Chicago Import said, American States dragged its feet on the claim, forcing the importer to borrow money and the owner to use his personal residence as collateral to cover overhead and pay creditors.
American States accused Chicago Import’s owner of setting the football-field-sized warehouse on fire or hiring someone else to do it. It also claimed that the importer misrepresented the value of the inventory.
On Monday, the insurer argued that Chicago Import wrongly introduced testimony that no charges of arson were brought against any individual with respect to the fire, even though its evidence was supposed to be limited to testimony that the identity of the individual who started the fire couldn’t be identified.
The court also wrongly barred evidence that the goods inside the warehouse were damaged before the fire, the insurer wrote.
Representatives for both sides Tuesday didn’t immediately return a request for comment.
Chicago Import is represented by Mark Roth of Orum & Roth LLC.
American States Insurance is represented by Cheryl Mondi, Peter Kanaris, David Heiss, Nicole Gallagher, Christopher Ransel and Jefferson Patten of Fisher Kanaris PC.
The case is Chicago Import Inc. v. American States Insurance Co., case number 1:09-cv-02885, in the U.S. District Court for the Northern District of Illinois.
--Additional reporting by Cara Salvatore and Joyce Hanson. Editing by Rebecca Flanagan.
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Massive, smoky fire engulfs warehouse
May 13, 2007|By Dan P. Blake, Mary Owen and Dave Wischnowsky, Tribune staff reporters
A massive extra-alarm fire erupted in a warehouse building on Chicago's Northwest Side on Saturday afternoon, emitting black smoke visible for miles and halting several Metra trains in the area.
The fire broke out about 5:25 in the 4100 block of North Knox Avenue, said Chicago Police Officer Tom Polick. By about 8 p.m., the fire was contained, but the roof of the building had collapsed.
Four people were in the building when the fire broke out, but all got out safely and no injuries were reported, said Chicago Fire Department Commissioner Raymond Orozco. The one-story factory building, owned by Chicago Imports, Inc., supplied materials to "dollar stores" and had products stacked roughly 18 to 20 feet high, Orozco said.
Aerosol products in the building prompted a series of explosions, but the smoke from the fire was not toxic, Orozco said.
Metra trains on the Milwaukee District North Line running from Chicago to Fox Lake were stopped on the line as firefighters ran hoses over the tracks, said Metra spokesman Tom Miller.
Earlier, smoke from the fire could be seen as far away as Evanston to the north, Downers Grove to the west and neighborhoods across the city. The Fire Department response rose to a four-alarm, with more than 250 firefighters on the scene, Orozco said.
"There's just smoke everywhere -- it's huge," said Ross Hudson, an employee at Taxicar Taxi on Knox Avenue about 10 blocks south of the site. "You can see the smoke for miles. It's super black."
The cause of the blaze was unclear Saturday evening.
The building, in an industrial area, is several blocks from the Kennedy Expressway, but Illinois State Police said no expressway lanes were closed due to the fire.
The fire did not affect CTA service other than causing a rerouting of the No. 18 Montrose bus, CTA spokeswoman Sheila Gregory said.