By: Richard E. Guttentag, Esq. and Alexander S. Beck, Esq., Stearns, Roberts & Guttentag, LLC
An insurer’s duty to defend its insured against a legal action arises when the complaint alleges facts that potentially bring the suit within policy coverage. When a complaint alleges facts showing two or more grounds for liability, one being within coverage and the other not, the insurer is obligated to defend the entire suit.
In James River Insurance Company v. Hufsey-Nicolaides-Garcia-Suarez Associates, Inc., 2014 WL 904710 (11 th Cir. 2014), a guest of a hotel contracted Legionnaire’s disease. The Health Department issued a Health Advisory stating that the chlorine levels in the hotel’s plumbing water system was insufficient to protect against potential water-borne illnesses, noted that three cases Legionnaire’s disease might be linked to the hotel, and advised that the water should not be consumed as a precautionary measure. Consequently, the hotel was forced to close while it repaired the water filtration system.
The Hotel sued the developers of the hotel alleging, in part, that because the water at the hotel did not have appropriate chlorine levels, the water could not be used for its intended purposes, and claimed damages for economic losses arising from the costs of closing down the hotel to repair the filtration system. The developers then filed a third party action against the mechanical engineer responsible for the design and installation of the hotel’s filtration system. The developer’s third-party complaint against the mechanical engineer incorporated the allegations made by the Hotel against the developers, and consisted of actions for indemnification and contribution alleging that the engineer failed to properly design the Hotel’s plumbing and filtration systems because it reduced the level of chlorine in the water to an unsafe level.
The mechanical engineer’s insurer brought a declaratory judgment action against the engineer seeking a judgment that it had no duty to defend or indemnify the engineer in the underlying litigation because all of the claims arose from the presence of bacteria in the water, and therefore the policy’s exclusions barred coverage. The pollution exclusion of the policy waived coverage for any claim “[b]ased on or directly or indirectly arising out of or resulting from or caused or contributed to by pollution/environmental impairment/contamination …” The pollution exclusion further barred coverage for “[a]ll liability and expense arising out of or related to any form of pollution …” The district court granted summary judgment for the insurer holding that the ‘pollution exclusion’ of the insurance policy applied, and therefore the insurer had no duty to defend or indemnify the mechanical engineer. The Insured appealed the district court’s ruling.
The sole issue on appeal was whether any of the underlying claims were covered by the insurance policy issued by the engineer’s insurer to the engineer, or whether one of the exclusions in the policy operated to bar coverage. The appellate court concluded that the district court erred in granting the insurer’s summary judgment because, regardless of whether the ‘pollution exclusion’ or the ‘fungi or bacteria exclusion” barred some coverage, a portion of the allegations and damages claimed against the mechanical engineer in the underlying action fell outside the policy’s exclusions because they were entirely unrelated to the presence of bacteria.
Under Florida law, an insurer’s duty to defend its insured against a legal action arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage. In other words, the allegations of the complaint determine an insurer’s duty to defend. The insured has a duty to defend even if the underlying allegations are inconsistent with the actual facts or completely without merit. The duty to defend extends to all claims of a particular action even if only a portion of the claims are within the scope of coverage. Therefore, if the complaint alleges facts showing two or more grounds for liability, one being within the insurance coverage and the other not, the insurer is obligated to defend the entire suit.
The appellate court determined that some of the allegations of the underlying litigation did not arise out of the presence of legionella bacteria, and as such, the pollution and bacteria exclusions would not apply to these claims. The developer’s third party complaint alleged that the insured failed to properly design the hotel’s plumbing and filtration systems, and therefore, it was liable if the developers were held responsible for the damages the hotel sought in its complaint. The Court reasoned that the Hotel’s allegations that its damages included costs related to “remediation” efforts of the improperly designed plumbing and filtration systems did not relate to the presence of pollution or bacteria, and therefore were sufficient to trigger the insurer’s duty to defend, which extended to all claims, even those that were not within the scope of coverage.
This case demonstrates that an insurer’s duty to defend its insured will be triggered when any of the claims fall within the scope of coverage under the insurance policy. Once an insurer has a duty to defend a particular claim, the duty will extend to all of the claims in the action, including claims that are not within the insurance coverage.
About the Author: Alexander S. Beck is an associate with Stearns, Roberts & Guttentag, LLC. Mr. Beck in construction law including construction lien claims, payment and performance bond claims, bid protests, construction contract preparation, and construction and design defect claims He can be reached for consultation at [email protected].