Insurance Law Hawaii

Insurer's Reliance on Mistake to Deny Coverage May be Bad Faith

   Is an insurer exposed to bad faith if it relies upon its own mistake to withhold payment under the policy?  The court answered yes in Lundy Enterprises, LLC v. Wausau Underwriters Ins. Co., No. 06-3509, 2009 U.S. Dist. LEXIS 121295 (E.D. La. Dec. 30, 2009).

   Wausau provided commercial property coverage for the insured's Pizza Hut locations and an office building.  Although the policy included a "Flood Coverage Endorsement" providing coverage for certain flood occurrences, the endorsement excluded properties in certain flood zones.  Prior policies issued to the insured did not include the flood zone exclusions.  The insured later discovered that the current policy was not supposed to have the flood zone exclusions and that Wausau made a mistake in writing the policy. 

   Wausau denied coverage for certain locations damaged in identified flood zones after Hurricane Katrina.  Subsequent to the hurricane, however, Wausau amended the flood endorsement to retract the exclusion of properties in these flood zones.  

   The insured sued, claiming that Wausau relied in bad faith upon its own mistake in writing the policy to deny flood coverage.  In its motion for partial summary judgment, Wausau argued its mistake could not be in bad faith because the Louisiana statute required a knowing act.  Further, the insured could not prove Wausau's actions were arbitrary and capricious. 

   The court refused to dismiss the bad faith claim, however.  The insured's claim for bad faith was not based on Wausau's making a mistake in writing the policy, but rather on Wausau's reliance upon its own mistake in withholding payment under the policy, and failing to pay under circumstances that were unreasonable, arbitrary, and without probable cause.   These issues could not be resolved on a motion for summary judgment.

Additional Insureds Not Entitled to Notice of Policy's Cancellation

   Defendants were sued in an underlying state court action.  See Riverport Ins. Co. v. Oakland Cmty. Housing, Inc., No. C 08-3883, 2009 U.S. Dist. LEXIS 104472 (N.D. Cal. Nov. 6, 2009).  Defendants were additional insureds under a policy issued by Riverport.  In its coverage action for declaratory judgment, Riverport secured an order awarding summary judgment that determined there was not duty to defend or indemnify. 

   Riverport now moved for summary judgment on defendants' two counterclaims, seeking declaratory relief that defendants were entitled to notice as additional insureds of cancellation of the policy and that Riverside breached its duty of good faith and fair dealing by failing to provide notice of the policy's cancellation.  Under California law, the insurer was only obligated to give notice of a policy's cancellation to named insureds.  Defendants argued that a certificate of liability insurance they received meant they were named insureds.  The court disagreed.  The certificate did not constitute an agreement between Riverport and defendants, but was simply evidence that a policy had been issued.  Therefore, defendants were not entitled to a declaratory judgment that Riverport should have given them notice of cancellation of the policy.

   Moreover, the bad faith claim failed as a matter of law once it was determined defendants were not entitled to notice of cancellation.

Dismissal of Excess Carriers Reversed

   The insured Condominium Association had primary and excess coverage.  See El-Ad Residences at Miramar Condo. Assoc. v. Mt. Hawley Ins. Co., 2009 U.S. Dist. LEXIS 92216 (S.D. Fla. Sept. 24, 2009).  Significant property damage was caused by Hurricane Wilma.  The insured alleged that three years after the hurricane, the insurers failed to adjust or settle claims for damages. 

   The insured filed suit seeking a declaratory judgment to determine the enforceability of the policies and the scope of the damage.  Claims for breach of contract and the breach of the implied warranty of good faith and fair dealing were also included.  The insurers moved to dismiss.  The excess insurers aruged exhaustion of the primary insurance was a condition precedent to their liability.  The court disagreed because it was not apparent from the face of the complaint and attached policies that it was beyond doubt that the insured could prove no set of facts in support of this claim.

   Further, the insured was entitled to declaratory relief to determine whether it had a valid and enforceable right to coverage and the total damages sustained from Hurricane Wilma.  Finally, although Florida recognized a cause of action for breach of implied warranty of good faith and fair dealing, here the claim was duplicitous of the breach of contract claim. Both relied on the same facts, i.e., that defendants failed to promptly determine the value of the insured's loss.  Therefore, the breach of implied warranty claims were dismissed without prejudice.

Insured's Claim for Workers' Compensation Benefits Survives Summary Judgment

  Whether the insured was acting within the course and scope of his employment contract was at issue when the Eighth Circuit Circuit reversed the District Court's determination of no workers' compensation coverage in Merriam v. National Union Fire Ins. Co. of Pittsburgh, Pennsylvania, No. 08-3547, 2009 U.S. App. LEXIS 15698 (8th Cir. July 17, 2009).

    In 2004, the insured contracted to become a truck driver and independent contractor for Landstar Ranger, an interstate trucking company.  The contract required the insured be covered under a workers' compensation policy.  Accordingly, the insured secured a Contractor Protection Plan (CPP) from National Union.  The policy allowed recovery for occupational accident  benefits at $1,000,000 per accident and nonoccupational accident benefits at only $7,500.  "Occupational" accident was defined as one which "occurs or arises out of or in the course of the Insured Person performing services within the course and scope of contractual obligations to the Contractee (Landstar)."

    The insured was performing a run from Sparks, Nevada to Cedar Rapids, Iowa, when he stopped at his home in Boone, Iowa for a mandatory federal Department of Transportation break.  He noticed his gravel driveway had a sinkhole, making it impossible to park his truck.  The insured used his own dump truck to lower gravel into the sinkhole.  When he was unable to put the bed of the dump truck into neutral, he reached under the truck bed to see whether a cable had caught.  The truck bed fell on him, causing serious injury.

    Aware the insured was injured while using a personal vehicle, National Union determined the accident was nonoccupational-related and issued benefits of only $7,500.  The insured sued for breach of contract and bad faith.  The District Court granted summary judgment to National Union.  The District Court reasoned that Landstar could not have reasonably foreseen that plaintiff's act of fixing a personal vehicle would fall "within the course and scope" of his contractual duties to haul cargo for Landstar. 

    The Eighth Circuit disagreed.  The insured's decision to take his mandatory break at his home and to fill the sinkhole with gravel so he could park in his driveway could be viewed as attempting to fulfill specific contractual obligations to Landstar.  These acts helped ensure the load was delivered with diligence, speed, and care.  The insured's actions, therefore, fell within "the course and scope" of his obligations to Landstar under the independent contractor agreement.  If the accident occurred as the insured claimed, it was "occupational" as defined by the policy.  Therefore, summary judgment was premature.

    The Eighth Circuit affirmed dismissal of the bad faith claim, however. National Union engaged in more than a cursory investigation into the claim.  The claim was fairly debatable and National Union had an objectively reasonable basis for its denial. 

Claim for Failure to Act in Good Faith Survives Motion to Dismiss

    In Cecilia Schwaber Trust Two v. Hartford Accident and Indemn. Co., No. JFM-06-0956, 2009 U.S. Dist. LEXIS 59788 (D. Md. July 14, 2009), Hartford unsuccessfully moved to dispose of the insured's claim for failure to act in good faith.

   Hartford's policy covered the insured's warehouse for the period March 1, 2002, through March 1, 2003.  In February 2003, a large snowstorm caused snow and ice to accumulate on the roof.  In March 2003, the roof sprung a series of leaks.  Hartford initially denied the claim, stating the damage was excluded based on faulty workmanship, maintenance, and wear and tear.  Later, Hartford agreed that approximately five percent of the loss was covered.

    The insured sued and Hartford moved to dismiss the good faith claim.  A new Maryland statute provided the insured could recover expenses and litigation costs in an action for coverage under a policy if it could be shown "the insurer failed to act in good faith."   "Good faith" was defined as making "an informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time the insurer made a decision on a claim."

   Despite the language of the statute, Hartford argued the "fairly debatable" standard should be adopted.  Under this standard, where a claim was not fairly debatable, an insurer's refusal to pay would be bad faith.  The court determined, however, that the fairly debatable standard did not comport with the language of the Maryland statute.  Moreover, the claim here was for failure to act in "good faith," which the Maryland courts had indicated was different from an action for bad faith.  Therefore, it would be inappropriate to apply the "fairly debatable" standard.

   Hartford further argued the new statute could not be applied retroactively.  The court disagreed, however, because the legislature intended to give the statute retroactive effect.

Bad Faith Claims Based on Insurer's Lack of Concern Denied

    Bad faith and coverage for looting were at issue in Spears v. State Farm Ins. Co., No. 08-3183, 2009 U.S. Dist. LEXIS 49554 (E. D. La. June 12, 2009).  The insureds' home was damaged by Hurricane Katrina on August 29, 2005.  A homeowner's policy issued by State Farm provided coverage of up to $179,700 for dwelling and up to $134,775 for contents and loss of use. 

    In September 2005, State Farm opened a claims file and advanced $2500.  In November 2005, State Farm inspected the property.  On November 25, 2005, State Farm paid $55,205,87 for dwelling loss and $21,096 for contents and loss of use.  State Farm also opened a separate claims file for the alleged looting, but the claim was never paid. 

    The insureds filed suit in 2008, arguing State Farm had not paid full benefits.  Insureds included a claim for bad faith.  After suit was filed, State Farm made an unsolicited tender of $18,960 after an expert evaluation found additional uncompensated damages.

    State Farm moved for partial summary judgment on the bad faith and looting claims.  The Louisiana statues did not penalize insurance companies for failing to pay claims, but for failing to pay claims in a manner that was arbitrary, capricious, or without probable cause.  If the insurer had a reasonable basis to defend the claim and acted in good-faith reliance on that defense, the statutory penalties for bad faith were inappropriate.  Here, the insureds offered no evidence to suggest that State Farm acted in bad faith.  The basis of the claim appeared to be that State Farm was not sufficiently concerned about the insureds' family's welfare after the hurricane.  While there was a dispute about coverage, the insurer had not acted in bad faith.

    State Farm also moved for summary judgment to dismiss the looting claim because the insureds had not pled the claim in the complaint.  The insureds had moved to amend their complaint to add a claim for damage from failure to pay the looting claim, but the motion had been denied.  State Farm further argued the statutory extension of the prescription period for Katrina claims did not apply.  Because there was no looting claim in the suit, State Farm's motion for summary judgment was denied as moot.  It would be inappropriate for the court to address the applicability of the statute extending the prescription period for Katrina claims when the looting claim was not properly before the court.  The parties were free to file motions in limine on the relevance of evidence of looting in regard to State Farm's alleged liability for underpayment of the claim.

Kauai Trial Court Finds Workers' Compensation Carrier's Delayed Payment in Bad Faith

    In our last post [here] we discussed a decision from the Oklahoma Supreme Court recognizing a bad faith claim against a workers' compensation insurer.  My Damon Key colleague and fellow blogger, Mark Murakami (hawaiioceanlaw.com), informed me of a similar case winding its way through the trial court on Kauai.  See Ordonez v. Hawaii Employers Mutual Ins. Co., Civil No. 060138 (Circuit Court for the Fifth Circuit, State of Hawaii). The Pacific Business News reported on the case here in January. The case was also recently reported by the Advocates Research Company.

    In Ordonez, the decedent was killed on January 4, 2005, when her all-terrain vehicle, used by her employer to check hiking trails, overturned.  Decedent was survived by her indigent mother, a resident of Venezuela.  A workers' compensation claim for full dependency benefits was filed on Plaintiff's behalf with Hawaii Employers Mutual Insurance Company (HEMIC). 

    HEMIC contested the claim and refused payment.  After a hearing in January 2006, the Department of Labor and Industrial Relations ordered that full dependency benefits be paid.  The Department found HEMIC had delayed making payments for more than a year without reasonable basis for doing so.  After payment was made, Plaintiff sued HEMIC for bad faith in its delay in making payments. 

       After a trial, Findings of Fact and Conclusions of Law were issued on April 9, 2009.  The court ruled HEMIC had sufficient information in January 2005 to determine the decedent's death was compensable.  The delay in acknowledging the claim was unreasonable and violated established industry standards for good faith and fair dealing.  The court further found HEMIC's motivation in denying Plaintiff's claim was to delay payment so the statute of limitations would expire and HEMIC could escape ever making payment.  Plaintiff was awarded $75,000 in general damages and $250,000 in punitive damages.

    Based on the on-line docket sheet, it appears that judgment has not yet been entered.  HEMIC informed the Pacific Business News that it was considering an appeal.

Bad Faith Established against Workers' Compensation Carrier

    In Summers v. Zurich Am. Ins. Co., No. 105617 (Okla. May 26, 2009) [here], the Oklahoma Supreme Court addressed confusion under state law in a establishing a bad faith claim against a workers' compensation carrier.

    Ms. Summers was injured in March 2004 while employed at Walmart.  She was an insured under a workers' compensation policy issued by Zurich.  Several orders from the Workers' Compensation Court directed that medical and wage benefits be provided to Ms. Summers.  On October 16, 2007, the Workers' Compensation Court entered an Order Authorizing Medical Treatment which repeated prior authorizations in 2004, 2005, and 2006.  Zurich did not appeal from this final order or any order of the Workers' Compensation Court. 

    Zurich, however, refused on several occasions to authorize the treatment ordered by the Workers' Compensation Court.   She sued Zurich, asserting its refusal to comply with the Court's order and provide benefits in a timely manner constituted bad faith.  Zurich moved for summary judgment, arguing Ms. Summers had failed to secure proper certification of her workers' compensation claim as a necessary statutory precondition to an allegation of bad faith.  The trial court granted Zurich's motion and the Court of Appeals affirmed.

    The Supreme Court reversed. Indeed, a claimant seeking to enforce a monetary workers' compensation award had to use the statutory mechanism and have the award certified by the Workers' Compensation Court for enforcement.  But a claimant who obtained an order certifying that non-monetary benefits had not been provided could pursue a tort claim for bad faith in the trial court without pursuing execution of a certified judgment. 

    Here, Ms. Summers alleged Zurich refused to authorize the medical treatment ordered by the Workers' Compensation Court.  The record contained an order certifying that previously awarded medical benefits had not been provided as ordered, and demonstrated no good cause for Zurich's failure to do so.  Ms. Summers could therefore choose to pursue a tort claim in the trial court for Zurich's continuing failure to pay the overdue court-ordered medical treatment.  Consequently, the trial court erred in granting summary judgment.

    Hawai`i law similarly considers a tort claim against the workers' compensation carrier to be outside and separate from the workers' compensation statutes.  See, e.g., Hough v. Pacific Ins. Co., Ltd., 83 Hawai`i 457, 927 P.2d 858 (1996); Catron v. Tokio Marine Management, Inc., 90 Hawai`i 407, 978 P.2d 845 (1999).  In our next post, we will update a bad faith claim against a workers' compensation carrier percolating its way through the trial court on the island of Kauai.

Bad Faith Claim For Delayed Payment Fails

    The insured's property was damaged during Hurricane Katrina by wind, wind driven rain, flooding, storm surge and water in Jupiter v. Automobile Club Inter-Insurance Exchange, No. 07-1689, 2009 U.S. Dist. LEXIS 44083 May 26, 2009). Plaintiff recovered $225,500 from Allstate, its flood insurance carrier.  The insured also held a homeowner's policy with Automobile Club, who paid a total of $106,079.47.  The insured argued this was insufficient because its property was a total loss.  Auto Club submitted the wind and rain damage was not substantial.  Further, Auto Club contended water damage, a flood exclusion, power failure exclusions, and neglect exclusions precluded further liability under the policy.

    Auto Club moved for summary judgment on the issues of bad faith and whether the insured had been fully compensated.  On the bad faith issue, the insured contended a factual issue existed regarding Auto Club's failure to timely pay the claim despite evidence of damage being provided.

    The Court granted Auto Club's motion on the bad faith issue.  Louisiana law provided statutory penalties against insurers for failure to timely resolve claims or pay settlement awards.  But the insured had to prove that the insurer knowingly committed actions which were completely unjustified, without reasonable or probable cause or excuse. 

    Here, Auto Club did not act arbitrarily, capriciously, or without probable cause in resolving the insured's claims.  Although the insured asserted there was a factual dispute as to the timeliness of payments, there was no evidence that the payments were not timely made.  Further, the contents list provided by the insured did not include receipts, and there remained a dispute as to the extent to which the insured's property was damaged by wind as opposed to flood.  The parties dispute over the total coast of repairs caused by a covered peril did not warrant the imposition of statutory penalties for bad faith.

    The court denied Auto Club's motion regarding whether the insured had been fully compensated, however, because a factual issue was presented.

Post-Loss Assignment Upheld By Another Louisiana Federal Court

    Consistent with the recent decision issued in In Re Katrina Canal Breaches Consolidated Litigation [prior post here], the District Court for the Western District of Louisiana upheld a post-loss assignment of a property policy.  See Disaster Relief Serv. of North Carolina, LLC v. Employers Mutual Cas. Ins. Co., No. 07-1925, 2009 U.S. Dist. LEXIS 29443 (W.D. La. April 6, 2009).

    The insured's apartment complex was damaged by Hurricane Rita.  The property was insured by Employers under a business protection policy that included coverage for damage to property and loss of business income.  The insured hired Paramount Insurance Repair Service to do initial damage mitigation work.  Without the insured's permission, Employers contacted Paramount and negotiated the scope and cost of all repairs to the property, notwithstanding the limited authority the insured had given Paramount.  The insured later fired Paramount and hired Disaster Relief Services (DRS) to complete the repairs.  DRS's Complaint alleged Employers then failed to adjust and provide coverage for certain property losses and damage despite receiving sufficient proofs of loss.

    After purchasing the property and receiving an assignment of future insurance proceeds, DRS sued Employers.  Employers moved for summary judgment, arguing the policy prohibited the assignment of "rights and duties" without the insurer's consent.  Noting the decision in Katrina Canal Breaches, the court found the insured was entitled to assign the rights under Employer's policy because the assignment to DRS was executed after the property damage occurred.  The assignment of rights under the policy included the insured's bad faith claims if such claims accrued to the insured at the time of the assignment.  Neither party had submitted a copy of the assignment of rights to the policy, so the court could not determine when the bad faith claims accrued. 

    Nevertheless, the court determined Employers did not act in bad faith in failing to timely pay a claim after receiving satisfactory proofs of loss.  Such a claim could only be asserted under Louisiana law if the failure to timely pay was arbitrary, capricious or without probable cause.  There was no evidence of unjustified refusal to pay amounts due.  Therefore, Employers' motion for summary judgment as to DRS's bad faith claims was granted.