Clausen Miller Makes Favorable First-Party Property Law; Reverses $8.2 Million Judgment Against Insurer
January, 2005
by Edward M. Kay and Melinda S. Kollross
Many property insurers are concerned about making “bad law” and will thus forego appeal of decidedly erroneous trial court rulings/judgments on coverage issues (and specific policy language) in order to “limit” the potential damage done as trial court rulings are not precedential. Although this strategy may be warranted in some cases, the converse must also be considered: might an appeal establish “good law” by reversing the erroneous position espoused below?
This was precisely the question confronting the insurer in National Union Ins. Co. of Pittsburgh, PA. v. Texpack Group, Inc., a Florida case seeking coverage for a multi-million dollar claim under the “ensuing loss” exception to a design defect exclusion.
The Trial Court's Erroneous Coverage Determination
Texpack upgraded one of its paper mills by installing a new “wet-end” unit – the machine that converts used paper products into pulp and then into recycled paper. Shortly after the upgrade, numerous defects in design and manufacture of the wet-end unit surfaced, leading to significant interruption of Texpack's business. After multiple attempts to correct the design defects proved unsuccessful, the paper mill was shut down. Texpack sued the insolvent and uninsured foreign design firm for breach of contract, and sought coverage for its business interruption and alleged extra expense losses under its “All Risk” property policy with National Union.
National Union denied coverage, asserting the following design defect exclusion applied to preclude warranty coverage for the defective work of the wet-end designer:
This policy does not insure:
D. against the cost of making good defective design or specifications, faulty material, or faulty workmanship.
Texpack claimed coverage was created by the following "ensuing loss" exception to the design defect exclusion, which restored coverage for:
Loss or damage resulting from such defective design or specifications, faulty material, or faulty workmanship
National Union also asserted that Texpack's purely economic losses were not covered under the business interruption and extra expense provisions of the property policy since they were admittedly not caused by physical loss or damage to covered property.
The trial court agreed with Texpack, erroneously holding that the ensuing loss exception to the design defect exclusion created coverage for Texpack's economic losses and entered judgment upon a jury verdict awarding Texpack $8.2 million in damages.
Success On Appeal
The insurer decided to go forward with the appeal. Clausen Miller's Appellate Practice Group was retained to lead the charge, supported by CM first-party property trial attorneys Greg Smith, Charlie Rocco and Bill Zieden-Weber. Appellate partner Barb Michaelides drafted the appellate briefs and presented oral argument before the Third District Court of Appeals of Florida. On March 16, 2005, the Appellate Court issued its opinion reversing the trial court's coverage determination and finding National Union's property policy excluded coverage for economic losses caused by design defect:
Since defective design or specifications are not perils covered under the policy, economic damage or loss resulting from these causes are excluded from coverage as well. (2005 Fla. App. LEXIS 3570)
The Court of Appeals then ordered that the case be remanded to the trial court for entry of final judgment in National Union's favor.
This was a significant victory in terms of both dollars saved and precedent established -- showing that a well-chosen and properly prosecuted appeal may sometimes be the best response to an egregious coverage determination by the trial court.
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