Sentinel Management Co. v. New Hampshire Ins. Co.

• Decision Date: 13 May 1997
• Docket Number: No. C8-96-2335,C8-96-2335
• Citation: 563 N.W.2d 296
• Parties: SENTINEL MANAGEMENT COMPANY, et al., Respondents, Aetna Casualty and Surety Company, et al., Defendants, v. NEW HAMPSHIRE INSURANCE COMPANY, Appellant.
• Court: Minnesota Court of Appeals

Page 296

563 N.W.2d 296

SENTINEL MANAGEMENT COMPANY, et al., Respondents Aetna Casualty and Surety Company, et al., Defendants, v. NEW HAMPSHIRE INSURANCE COMPANY, Appellant.

No. C8-96-2335.

Court of Appeals of Minnesota.

May 13, 1997.

Syllabus by the Court

Contamination by asbestos fibers released from asbestos-containing materials constitutes a fortuitous, direct, physical loss to property under an all-risk, first-party property insurance policy.

Thomas A. Pearson, Paul A. Banker, Arthur, Chapman, Kettering, Smetak & Pikala, Minneapolis, Stuart Cotton, Wayne R. Glaubinger, Jeffrey C. Crawford, Mound, Cotton & Wollan, New York City, for Appellant.

Lawrence A. Moloney, Doherty, Rumble & Butler, P.A., Minneapolis, Thomas R. Meites, Paul W. Mollica, Meites, Frackman, Mudler & Burger, Chicago, IL, for Respondents.

Considered and decided by LANSING, P.J., and SHORT and KLAPHAKE, JJ.

OPINION

SHORT, Judge.

After denying summary judgment for New Hampshire Insurance Company (New Hampshire), the trial court certified certain insurance coverage issues as important and doubtful pursuant to Minn. R. Civ.App. P. 103.03(h). On appeal, New Hampshireargues the asbestos contamination of residential rental properties owned by Sentinel Management Company is not a covered loss under Sentinel's all-risk insurance policy.

FACTS

Sentinel Management Company and other general and limited partnerships (collectively, Sentinel) own and manage certain residential rental properties in the Twin Cities. In 1991 and 1992, Sentinel purchased "all-risk" first-party insurance coverage from New Hampshire. The relevant parts of the policy state:

III. PERILS INSURED AGAINST

Coverage: This policy is extended to insure against all risks of direct physical loss to building(s), subject to provisions and stipulations herein * * *.

* * * * * *

V. EXCLUSIONS

In addition to the provisions of POP-220 and part A this policy does not insure under this form against:

D. Loss caused by:

1. Wear and tear, deterioration, rust or corrosion, mould, wet or dry rot, inherent or latent defect; smog; smoke, vapor or gas from agricultural or industrial operations; mechanical breakdown, including rupture or bursting caused by centrifugal force; settling, cracking, shrinkage, bulging or expansion of pavements, foundations, walls, floors, roofs or ceilings; animals, birds, vermin, termites or other insects; unless loss by a peril not otherwise excluded ensues and then the company shall be liable for only such ensuing loss.

* * * * * *

This Policy Does Not Insure Under This Form Against:

A. Loss occasioned directly or indirectly by:

1. Enforcement of any local or state ordinance or law regulating the construction, repair or demolition of buildings or structures unless such liability is otherwise specifically assumed by endorsement.

(Emphasis added.) Although the comprehensive general liability part of Sentinel's policy contains a contamination exclusion, the first-party section does not.

Sentinel's apartment buildings were built between 1962 and 1978, with asbestos-containing materials (ACMs) incorporated in ceiling and floor tiles, surface treatments, and thermal and mechanical systems insulation. In 1992, experts retained by Sentinel concluded all the buildings contained asbestos fibers on carpeting and other surfaces, released from the ACMs by abrasions from normal residential and building maintenance activities. While asbestos left undisturbed in building materials does not pose a health risk, released asbestos is a known carcinogen. The buildings remain occupied, however, and Sentinel has not yet taken action to remove the asbestos fibers. No ordinances or regulations require Sentinel to abate the contamination.

Sentinel brought suit against New Hampshire and its other insurance carriers in 1994, claiming it had suffered a direct, physical loss from the release of asbestos fibers and resultant contamination of the buildings. The trial court granted summary judgment in favor of the other insurers, finding coverage had not been triggered until Sentinel discovered the asbestos contamination while New Hampshire's policy was in effect in 1992. New Hampshire moved for summary judgment, arguing the claimed losses did not fall within the coverage of its all-risk policy. The trial court denied New Hampshire's motion, but certified the following question as important and doubtful:

Whether a loss resulting from the release of asbestos fibers in a residential building caused by abrasions of asbestos-containing materials, air circulation and building vibrations is a covered peril under an all-risk, first-party property insurance policy?

New Hampshire appeals from the trial court's denial of summary judgment.

ISSUES

I. Was Sentinel's loss from the release of asbestos fibers fortuitous?

II. Does asbestos contamination constitute a direct physical loss?

III. Is Sentinel's loss excepted from the policy's wear-and-tear exclusion by the ensuing loss clause?

IV. Is Sentinel's loss covered despite the policy's ordinance exclusion?

ANALYSIS

On appeal from a denial of summary judgment, this court determines whether the trial court erred in its application of the law and whether genuine issues of material fact exist. Nicollet Restoration, Inc. v City of St. Paul, 533 N.W.2d 845, 847 (Minn.1995). In examining the record, we view the evidence in the light most favorable to the nonmoving party. Id. Construction of an insurance contract presents a question of law, which we review de novo. Transport Indem. Co. v. Dahlen Transp., Inc., 281 Minn. 253, 259, 161 N.W.2d 546, 550 (1968) (quoting Leslie v. Minneapolis Teachers Retirement Fund Ass'n, 218 Minn. 369, 373-74, 16 N.W.2d 313, 315 (1944)).

I.

Generally, an "all-risk" insurance policy creates

a special type of coverage extending to risks not usually covered under other insurance, and recovery under an "all-risk" policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.

13A George E. Couch, Couch on Insurance 2d § 48:141 (rev. ed.1982); accord 5 John Alan Appleman & Jean Appleman, Insurance Law and Practice § 3092 (rev. ed. 1970 & Supp.1997). The implied requirement of fortuity in all-risk insurance policies is universally recognized. Adams-Arapahoe Sch. Dist. No. 28-J v. Continental Ins. Co., 891 F.2d 772, 775 (10th Cir.1989) (citing C.C. Marvel, Annotation, Coverage Under "All Risks" Insurance, 88 A.L.R.2d 1122, 1127-28 (1963)).

New Hampshire argues the asbestos contamination of Sentinel's buildings is not fortuitous because the release of asbestos fibers through ordinary wear and tear was certain to occur. See Chute v. North River Ins. Co., 172 Minn. 13, 15, 214 N.W. 473, 474 (1927) (noting purpose of all-risk policy is to secure "indemnity against accidents which may happen, not against events which must happen") (citation omitted). New Hampshire's reliance on the supreme court's decision in Chute is misplaced. In Chute, the court denied the plaintiff insurance proceeds to replace an opal that cracked due to an inherent defect, noting the parties contracted for "indemnity against loss or damage from fortuitous and extraneous circumstance rather than warranty of the quality and durability of chattels." Id. at 15-16, 214 N.W. at 474. Sentinel, however, seeks proceeds to remove asbestos fibers released from the ACMs by extraneous forces, not replacement value for the ceilings and walls, which have worn over time. Therefore, Chute does not compel reversal of the trial court.

An occurrence is fortuitous if "the outcome of the event * * * [is not] known in advance by the insured." Bituminous Cas. Corp. v. Bartlett, 307 Minn. 72, 78 n. 8, 240 N.W.2d 310, 313 n. 8 (1976) (citation omitted); Domtar, Inc. v. Niagara Fire Ins. Co., 552 N.W.2d 738, 746 (Minn.App.1996), review granted (Minn. Oct. 17, 1996). This element of risk is central to insurance contracts because "[o]ne cannot insure against a certainty." Bartlett, 307 Minn. at 78 n. 8, 240 N.W.2d at 313 n. 8 (citation omitted). Minnesota's treatment of fortuity is consistent with the weight of foreign authority, which has adopted the Second Restatement's view that a fortuitous event is an event

which so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within the control of third persons; it may even be a past event, as the loss of a vessel, provided that the fact is unknown to the parties.

Restatement of Contracts § 291 cmt. a (1932) (emphasis added), quoted in University of Cincinnati v. Arkwright Mut. Ins. Co., 51 F.3d 1277, 1281 (6th Cir.1995), Intermetal Mexicana, S.A. v. Insurance Co. of N. Am., 866 F.2d 71, 77 (3d Cir.1989), Insurance Co. of N. Am. v. U.S. Gypsum Co., 870 F.2d 148, 151 (4th Cir.1989), Adams-Arapahoe, 891 F.2d at 775, Peters Township Sch. Dist. v. Hartford Accident & Indem. Co., 833 F.2d 32, 37 (3d Cir.1987), Fidelity & Guar. Ins. Underwriters, Inc. v. Allied Realty Co., 238 Va. 458, 384 S.E.2d 613, 615 (Va.1989); see also Appleman, supra, § 3092 (citing Restatement definition of fortuity). Under this view, a "loss caused by a pre-existing defect is fortuitous so long as neither party knew of the defect or expected the loss." Adams-Arapahoe, 891 F.2d at 775.

Sentinel seeks recovery, not for the mere presence of ACMs in the buildings, but for the release of asbestos fibers and resultant contamination. Cf. Leafland Group-II v. Insurance Co. of N. Am., 118 N.M. 281, 881 P.2d 26, 28 (N.M.1994) (holding mere presence of ACMs did not constitute fortuitous loss because loss existed, albeit undiscovered, when insureds purchased building). In addition, Sentinel presented evidence that its decision to abate the contamination was not a voluntary business decision, but a response to existing damage. Cf. Arkwright, 51...