Liability policies cover sums an insured becomes legally obligated to pay to a third-party as damages for a loss. Typically, there is no coverage in a liability policy for expenses incurred by the insured to repair damage to the insured’s own property. Additionally, nearly every liability policy has an owned-property exclusion. In a recent case, the 5th Circuit addressed this subject and whether an exception to the owned-property exclusion applied.
In Eagle Water, L.L.C. v. Ash, No. 19-30056 (5th Cir. Sep. 26, 2019) (unpublished), the owner of a sewer system repaired that system following a localized collapse and sought to recover the cost of repair from its liability insurer. The insurer paid for property damage suffered by a homeowner when the sewer system backed up because of the collapse, but rejected the policyholder’s request to cover the cost for repairing the sewer system. As the court noted, without those repairs, there could have been additional backups or sewage spills.
The policy had the usual liability coverage grant providing coverage for “those sums that the Insured becomes legally obligated to pay as damages because of . . . property damage.” The policy also had the usual owned-property exclusion that precluded coverage for damage to property “owned by the Insured.”
After the insurer rejected the claim, the policyholder sued and the insurer moved for summary judgment. The district court granted summary judgment to the insurer reasoning that the repair costs were not covered by the liability insurance policy because those costs were not damages that the policyholder became legally obligated to pay.
In affirming, the circuit court held that the district court correctly determined that the policyholder’s sewer repair costs were not covered by its liability insurance policy. The court stated that when the policyholder paid to repair its sewer system, it was not compensating anyone for loss or injury, so the repair costs were not damages and not covered. Damages, held the court are money claimed by, or ordered to be paid to, a person as compensation for a loss or injury (citations omitted).
The appellate court rejected the policyholder’s argument that an exception to the owned-property exclusion should apply. That judicial exception, said the court, arises in situations where the costs expended are done so to prevent future harm to third parties. The court distinguished the operative case and noted that in that case the repairs were necessary to prevent imminent or immediate harm to third parties because actual damages had occurred. Notably, the court stated that concluding that an owned-property exclusion does not prevent coverage is not the same as concluding that coverage exists. The court concluded that no matter whether the owned-property exclusion applied, the policyholder’s repair costs were not covered by the policy, because those costs were not damages as defined by the liability policy.