CGL Coverage: Insured’s Investigation and Overhead Expenses Not Covered
November 9, 2010 4 Comments
Every once in awhile a policyholder asks whether the costs it incurred in addressing a third-party property damage claim, such as inspection costs, personnel costs, overhead costs and attorneys’ fees are covered by its Commercial General Liability (“CGL”) policy. Unless the costs qualify for coverage under the “Supplementary Payments” provisions of the policy (which typically obligate the insurer to reimburse the insured for “all reasonable expenses incurred by the insured at [the insurer's] request”) or the insurer has breached a duty to defend, these types of costs are generally not covered. The issue was addressed in Lennar Corp. v. Great American Ins. Co., 200 S.W.3d 651, 679-680 (Tex. App. Houston, 14 Dist. 2006). That case stemmed from the insured’s application of EIFS to residential homes. The EIFS entrapped moisture which resulted in water damage to some of the homes. Depending on the home, the water damage included wood rot, damage to substrate, sheathing, framing, insulation, sheetrock, wallpaper, paint, carpet, carpet padding, wooden trim, and baseboards, mold damage, and termite infestation. Lennar presented three types of claims: (1) the costs to repair the damage to homes; (2) the cost to remove and replace EIFS as a preventative measure in all homes; and (3) overhead costs, inspection costs, personnel costs, and attorneys’ fees to assess damage in the homes. Lennar claimed that its overhead costs, inspection costs, personnel costs, and attorneys’ fees constituted ”damages because of” property damage within the meaning of the policy’s insuring clause and, thus, should be covered. The court disagreed, stating:
Lennar ignores the “legally obligated to pay” language in the insuring agreement. The “insuring agreement” provides that the carrier will pay those sums that Lennar “becomes legally obligated to pay as damages because of . . . property damage.” (emphasis added). The policies do not include a definition of “legally obligated to pay.” However, giving the phrase its ordinary meaning, it means an obligation imposed by law, such as an obligation to pay pursuant to a judgment, settlement, contract, or statute. * * * While Lennar may have been legally obligated to pay the third-party EIFS claims by replacing EIFS, making repairs, and/or making cash payments, it was not legally obligated to incur its own overhead costs, inspection costs, personnel costs, and attorneys’ fees in connection with settling the claims. Moreover, the insuring agreement clearly refers to the claimant’s damages that the insured becomes legally obligated to pay. In contrast, Lennar’s overhead costs, inspection costs, personnel costs, and attorneys’ fees are not components of the homeowners’ damages. Rather, they are Lennar’s own costs incurred in connection with settling the EIFS claims. Therefore, Lennar was not legally obligated to pay these costs as “damages because of . . . property damage.”
The situation may, of course, be different with regard to legally mandated expenses. See e.g., Minnesota Min. and Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175, 184 (Minn.1990) (“[w]e hold that expenditures mandated by [law] . . . which are necessary to effectuate the cleanup of contamination which has already occurred to the state’s water resources, are ‘damages because of . . . property damage’ within the meaning of the comprehensive general liability insurance policies issued by these defendants”); Northern States Power Co. v. Fidelity and Cas. Co. of New York, 504 N.W.2d 240, 245-246 (Minn. Ct. App. 1993) (“mandated expenditures necessary to clean up the groundwater and the contaminated soil causing the groundwater pollution and other expenses causally related to remedying the groundwater pollution are covered”), aff’d as modified and remanded, 523 N.W.2d 657 (Minn. 1994); Aerojet-General Corp. v. Superior Court, 211 Cal.App.3d 216, 237, 257 Cal.Rptr. 621, 634 – 635 (Cal.App. 1 Dist. 1989) (“some portion of the response costs in this case will be covered as “damages,” because they will constitute legally compelled expenses for the cleanup of extant pollution”).
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