Insurance Law Hawaii

Hawaii Supreme Court Affirms Denial Cancellation of Policy Based on Misrepresentation

   In October, we reported here that the Intermediate Court of Appeals affirmed the cancellation of a policy based on the insured's misrepresentation of the type of vehicle being insured.  The Hawaii Supreme Court recently affirmed the ICA's decision.  See Farmer v. Pacific Speciality Ins. Co., 2011 Haw. LEXIS 28 (Haw. Feb. 7, 2011).

   Farmer purchased a used motorcycle from a third party.  The motorcycle was later stolen.  Farmer had a policy insuring a 2000 Harley-Davidson.  After the motorcycle was stolen, it was determined that bike was not a Harley Davidson, but a kit bike that was obtained through a magazine.  The insurer refunded the insurance premiums paid by Farmer and rescinded the policy.

   Farmer sued the insurer, seeking $20,000 for the amount owed Farmer on his claim for the stolen Harley Davidson.  The district court found that the motorcycle was not a Harley-Davidson.  Further, although Farmer had not engaged in fraudulent misrepresentation, he had made a material misrepresentation that the motorcycle was a Harley-Davidson in the insurance application.  Therefore, the district court entered judgment in favor of the insurer and against Farmer.

   The Supreme Court affirmed. The district court relied on Haw. Rev. Stat. sec. 431:10-209, which provided, in part, "A misrepresentation shall not prevent a recovery on the policy unless made with actual intent to deceive or unless it materially affects either the acceptance of the risk or the hazard assumed by the the insurer." 

   Farmer's argument on appeal was that he did not misrepresent the manufacture of the motorcycle as being Harley-Davidson.  He stated that he simply provided the certificate of title for the motorcycle which indicated that it was a Harley-Davidson.  An employee of the insurer, however, testified that when completing the insurance application, Farmer told her that the motorcycle was a Harley-Davidson, in addiction to giving her the certificate of title.  This testimony provided substantial evidence to support the district court's finding that Farmer had made a misrepresentation regarding the manufacturer of the motorcycle.

No Coverage Where Contract's Indemnity Provision Never Triggered

   Whether the insurer was obligated to indemnify its insured for potential liability under a contractual indemnity provision was at issue in Farmers Ins. Exchange v. RNK, Inc., 2011 U.S. App. LEXIS 1255 (1st Cir. Jan. 21, 2011).

   RNK, a telephone company, and Ripple, a company providing conference services including chat lines, entered an Agreement in 1999.  RNK agreed that Ripple would install at RNK's premises electronic equipment necessary for Ripple to provide conferencing services to its customers.  In order for Ripple's chat lines to function, a call had to travel over RNK's network and through Ripple's hardware and software.  Under paragraph three of the Agreement, Ripple would "indemnify RNK and hold harmless from and against all damage claims associated with any equipment of Ripple."  Paragraph ten provided Ripple would indemnify RNK from claims arising from all "marketing" and "content."

   In 1998, the New York Public Service Commission issued an order addressing the blocking of chat lines.  The purpose of the order was to protect minors by providing end-users the ability to block the completion of telephonic communications.  RNK never complied with implementing the regulatory order.

   In 2005, Jane Doe sued RNK, alleging it failed to comply with the regulatory order by not assigning blockable telephone numbers to chat lines.  As a result, she was improperly able to gain access to a chat line through which she met several individuals who eventually sexually assaulted her. 

   RNK's insurer settled the Doe Lawsuit and then, in the name of RNK, sought indemnity from Ripple and Ripple's insurer, Farmers.  RNK argued the Agreement required indemnification from the claims asserted in the Doe Lawsuit.

   Farmers filed for a declaratory judgment against both Ripple and RNK, seeking a ruling that it had no duty to defend or indemnify RNK in the Doe Lawsuit.  The district court denied RNK's motion for summary judgment and granted Farmers and Ripple's motion for summary judgment.

   The First Circuit affirmed.  The Doe Lawsuit alleged that RNK's tortious failure in violation of the regulatory order to assign blockable codes to the chat lines was the proximate cause of her damages.  RNK contended that this claim was covered under paragraphs three's indemnification obligation.  RNK argued Doe's claim was associated with Ripple's "equipment" because the chatline would have never operated without Ripple's equipment, and, without the chat line, the Doe Lawsuit would have never arisen.  The First Circuit found it was unreasonable to find that paragraph three required Ripple to indemnify RNK against all claims that could somehow be traced back to the existence of Ripple's chatlines.  Instead, the indemnification obligation related to claims specifically caused by Ripple's tangible equipment located in RNK's premises. 

   RNK also sought indemnification under paragraph ten of the Agreement.  It was clear, however, that the purpose of paragraph ten was to protect RNK from possible unlawful conduct by Ripple.  Ripple did not agree under paragraph ten to indemnify RNK for claims arising from conversations of third party customers that Ripple did not generate and could not monitor.  

  Accordingly, Ripple had no indemnification obligations under the Agreement and Farmers' obligations under Ripple's policy were not triggered.

Post-Loss Assignment Without Consent Of Insurers Invalid

   Following recent Fifth Circuit precedent, the federal district court ruled that the assignment made after the loss without the insurers consent was invalid.  See Nautilus Ins. Co. v. Concierge Care Nursing Centers, Inc., 2010 U.S. Dist. LEXIS 136842 (S. D. Tex. Dec 28, 2010).

   In 1999, Brae Burn Construction Company Inc. entered into a contract to build a skilled nursing facility for Concierge.  Brae Burn had several subcontractors who were insured by their own insurers.  In August 2000, Concierge took possession of the building.

   Thereafter, Concierge sued Brae Burn for alleged damage to the building, including water leaks and mold.  In August 2008, Concierge and Brae Burn settled for $3 million.  As part of the settlement, Brae Burn assigned its claims against the subcontractor's insurers. 

   The insurers filed suit for a declaratory judgment seeking to establish that Concierge did not have coverage under any of the relevant policies.  The insurers movedfor summary judgment arguing that any purported assignment of Brae Burn's claims against the insurers was invalid under the anti-assignment provisions of the policies.  These provisions barred assignment of any rights and duties under the policy without the insurer's written consent.

   Concierge argued that the anti-assignment provisons did not apply to post-loss assignments.  The court disagreed, determining that the Fifth Circuit's decision in Keller Found., Inc. v. Wausau Underwriters Ins. Co. [post here] held that non-assignment clauses were enforceable in Texas even for assignments made post-loss.  The Fifth Circuit rejected the argument that the insurance company must show prejudice in order to enforce the anti-assignment clause.

   Here, the anti-assignment provisions of the policies precluded assignment of Brae Burn's rights to Concierge absent written consent of the insurers.  Because there was no written consent, there were no valid assignments.

 

Volitional Acts Negate Allegations of Negligent Misrepresentation

   The Archdiocese sought coverage under its CGL policy for allegations of sexual abuse committed by its former priests.  Because the underlying complaints alleged volitional acts rather than accidental occurrences, the court determined there was no coverage.  See Doe v. Archdiocese of Milwaukee, 2010 WISC. App. LEXIS 954 (Wis. Ct. App. Nov. 23, 2010).

   Several complaints were consolidated for appeal involving allegations of sexual abuse by the priests.  The complaints alleged causes of action for negligent misrepresentation stating that the Archdiocese represented that children were safe in the presence of the priests despite high-ranking personnel having the knowledge of the priests' histories of sexual abuse.  Further, the Archdiocese allowed the priests to have continued access to children through parishes and schools, thereby subjecting the plaintiffs to abuse.

   The Archdiocese tendered its defense to its carrier, OneBeacon Insurance Company.  OneBeacon intervened in the cases and sought a declaration of no coverage.  The trial court determined there was no coverage obligation because there was no occurrence.

   On appeal, the Archdiocese argued that because it did not intend to harm the plaintiffs, the allegations in the underlying complaints were within coverage provided by OneBeacon's policy.  OneBeacon argued there was no coverage for alleged negligent misrepresentation because there was nothing accidental about the misrepresentation.  Rather, the Archdiocese engaged in volitional acts.

   The Wisconsin appellate court agreed with OneBeacon.  By placing the children in harms way, the Archidocese's acts were volitional.  Where a volitional act was involved in a misrepresentation regarding a false statement, that act removed it from coverage as an "occurrence" under the policy.  The proper focus was not the ultimate injury the plaintiffs suffered, but rather the underlying acts of the Archdioceses that led to the plaintiffs' injuries.  The complaints alleged that agents of the Archdiocese were aware of the sexual abuse histories of some of its clergy but still kept the clergy in contact with the children.  The children were allegedly victims of molestation.  The underlying act that let to the plaintiff's injury, therefore, was the misrepresentation that the plaintiffs would be safe in the presence of the priests.  The proper focus for determining coverage, then was on the misrepresentations leading to the molestation.

Allocation Issues Addressed

   A thoughtful opinion concerning the allocation of indemnity obligations between an insurance company and a policyholder was rendered in Peabody Essex Museum, Inc. v. United States Fire Ins. Co., 2010 U.S. Dist. LEXIS 106275 (D. Mass. Sept. 30, 2010).

   At some point over the last several decades, an oil tank on the insured Museum's property ruptured, and oil seeped over to the neighbor's property.  The oil was discovered in May 2003.  An investigation showed that the oil originated from the Museum's property.  The neighbor submitted a demand letter for $400,000.  

    U.S. Fire issued a policy to the Museum in effect from December 19, 1983 to December 19, 1985.  Although the policy was effective for another year, it had an absolute pollution exclusion precluding coverage, as did all subsequent policies.  U.S. Fire refused to defend the Museum.  The Museum settled with the neighbor for $300,000.  U.S. Fire refused to indemnify for the settlement.  The Museum then sued U.S. Fire for declaratory relief.

      A prior ruling in the case determined that U.S. Fire breached its duty to defend.  As a result, U.S. Fire now carried the burden of proof on the indemnity issue to show the oil damage was not covered.  In a June 2009 trial, a jury found U.S. Fire had not met its burden to show damage only occurred after December 19, 1985, or subsequent to its policy period.  Nor did U.S. Fire meet its burden to show the date on which the release of oil first caused property damage. 

    The current opinion addressed the impact of a recent case decided by the Massachusetts Supreme Judicial Court (SJC), Boston Gas v. Century Indemn. Co., 454 Mass. 337 (2009).  There, the SJC held that liability among  several insurers with triggered policies should be prorated where the insured incurs covered costs as a result of ongoing environmental contamination occurring over more than one year and the insurer provided coverage for less than the full period of years in which the contamination occurred. Further, the court held that a "time-on-the-risk" method for allocation of pro rated liability was applicable when available evidence did not allow a more accurate allocation of losses. 

   The court noted that Boston Gas presented the typical situation in which the insured must prove coverage. Here, the breach of the duty to defend shifted the burden of proof, which meant U.S. Fire had to prove noncoverage.  At trial, U.S. Fire was unable to meet its burden as to when the property damage began.  Therefore, the current dispute was whether U.S. Fire was responsible for paying the full indemnity pursuant to Boston Gas.

   Since U.S. Fire failed to meet its burden, the court construed the jury's findings to mean that the allocation period began on the first day of U.S. Fire's policy.   If the allocation period extended beyond U.S. Fire's coverage into periods when the Museum was uninsured, indemnity would be divided between the insured and uninsured periods in accordance with Boston Gas. 

    The appropriate end date was more difficult to determine, however.  The issue was not addressed in the jury trial and U.S. Fire never had an opportunity to present evidence on when the oil stopped causing damage. Therefore, a new trial was ordered to determine when the spilled oil stopped causing additional property damage which would mark the end of the allocation period.  The Museum could present evidence that the spilled oil stopped spreading at some point prior to 2003, and U.S. Fire could present evidence that it continued to spread after the discovery date.

   Finally, the court could not determine whether the "time-on-the-risk" method of allocation was applicable.  The ideal method of allocation was a "fact-based" allocation, in which loss was allocated based on the precise injury that took place during each policy or uninsured period.  Therefore, at the trial, the Museum could present evidence for a "fact-based" allocation.

 

Indiana Supreme Court Holds Construction Defects Can be an "Occurrence"

   The Indiana Supreme Court has now weighed in on liability coverage for construction defects and has decided faulty workmanship with unforeseen consequences is an occurrence.  See Sheehan Construc. Co. Inc. v. Continental Cas. Co., 2010 Ind. LEXIS 557 (Ind. Sept. 30, 2010). 

   Sheehan was the general contractor for construction of homes in a residential subdivision and hired subcontractors who actually built the homes.  After construction, some homes had leaking windows, fungus growth on the siding, deteriorating and decaying floor joists and water damage to the interior of the home including water stained carpeting.  These problems were caused by Sheehan's subcontractors. 

   When suit was filed Sheehan sought coverage under its CGL policy with Continental.  The policy excluded coverage for damage to the insured's property and work as follows:

    This insurance does not apply to:

    . . . .

    1. Damage to Your Work

    "Property Damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."

   This exclusion does not apply if the damages work or the work out of which the damage arises was performed on your behalf by a subcontractor.

     The homeowners eventually settled in mediation for $2.8 million.  Sheehan assigned any rights it had against Continental.   Continental filed a declaratory judgment action seeking a declaration that it was not obligated to indemnify Sheehan.  The trial court granted summary judgment to Continental, finding there was no "occurrence" or "property damage." 

   The Indiana Supreme Court reversed.  The court found the Wisconsin Supreme Court's decision in Am. Family Mut. Ins. Co. v. Am Girl, Inc., 673 N.W. 2d 65 (Wis. 2004), persuasive.  There, the court noted that "CGL policies generally do not cover contract claims arising out of the insured's defective work or product, but this is by operation of the CGL's business risk exclusions, not because a loss actionable only in contract can never be the result of an 'occurrence' within the meaning of the CGL's initial grant of coverage."  Id., 673 N.W. 2d at 76. 

   Consequently, the Indiana court aligned itself with those jurisdictions adopting the view that improper or faulty workmanship does constitute an accident so long as the resulting damage was an event that occurred without expectation or foresight.  Faulty workmanship that was intentional from the viewpoint of the insured could not be an "accident" or an "occurrence."  On the other hand, if the fault workmanship was "unexpected" and "without intention or design," then it was an accident within the meaning of the CGL policy.

  Additional support for this holding was found by considering the policy in its entirety.  The CGL policy included an exclusion for damage to "your work" and then narrowed the exclusion by expressly declaring that it did not apply "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."  If the insuring provisions did not confer an initial grant of coverage, then there would be no reason for a "your work" exclusion.

   Accordingly, the Indiana Supreme Court has parted ways with the Hawaii Intermediate Court of Appeal, which decided earlier this year that construction defects were not covered because they arose from breach of contract and not from an occurrence.  See Group Builders v. Admiral Ins. Co., 123 Haw. 147, 148 (Haw. Ct. App. 2010) [post here].

 

Misrepresentation Justifies Insurer's Cancellation of Policy

   The insurer's cancellation of a policy based upon a misrepresentation of the vehicle being covered was deemed justified by the Hawaii Intermediate Court of Appeal in Farmer v. Pacific Specialty Ins. Co., 2010 Haw. App. LEXIS 525 (Haw. Ct. App., Sept. 30, 2010).

   The insured purchased a policy for a used motorcycle that was later stolen.  The policy was issued for a 2000 Harley-Davidson.  After the motorcycle was stolen, an investigation showed it was not a Harley-Davidson, but a kit bike that was obtained through a magazine.  The insurer refunded the premiums and rescinded the policy.

   The insured sued, seeking judgment for $20,000, the value of the stolen motorcycle.  The trial court determined the motorcycle was not a Harley-Davidson and, although the insured had not engaged in fraud or intentional misrepresentation, he had made a material misrepresentation that the motorcycle was a Harley-Davidson in the insurance application.  The trail court relied on Haw. Rev. Stat. 431:10-209, which states, in part, "A misrepresentation shall not prevent a recovery on the policy unless made with actual intent to deceive or unless it materially affects either the acceptance of the risk or the hazard assumed by the insurer." 

   On appeal, the insured argued the trial court should not have relied on the statute because he did not misrepresent the manufacturer of the motorcycle as being Harley-Davidson.  Instead, the insured merely provided the certificate of title for the motorcycle which indicated that it was a Harley-Davidson.  

    An agent for the insurer testified, however, that the insured told her the motorcycle was a Harley-Davidson.  Accordingly, there was substantial evidence to support the finding that a misrepresentation was made. The insurer had also testified that the misrepresentation was material to the acceptance of the risk it assumed and the policy would not have been issued had it known the motorcycle was a kit bike.  The insured failed to argue on appeal that the district cort's finding of materiality was erroneous, and thus waived the claim.

    

  

 

CGL Exclusion for Auto Accidents Bars Coverage

   An exclusion under a CGL policy for bodily injury arising out of automobile accidents prevented coverage when an employee was at fault.  See Sprinkles v. Assoc. Indemn. Corp., 2010 Cal. App. LEXIS 1532 (Cal. Ct. App. Sept. 1, 2010).

   Bibinz, an employee of Sinco, caused the accident, killing the deceased.  The deceased's family sued, alleging that Sinco negligently hired Bibinz, an uninsured and undocumented alien with a lengthy criminal record.  Sinco had a commercial automobile policy issued by General Insurance with a policy limit of $1,000,000, an excess and umbrella policy issued by Fireman's Fund with a $1,000,000 policy limit, and a CGL policy issued by Fireman's Fund with a $1,000,000 policy limit. General and Fireman's Fund, as insurer of the excess over the auto policy, agreed to provide coverage.  Fireman's Fund, however, denied coverage under the CGL policy. 

   Plaintiffs partially settled, with General paying its $1,000,000 primary limit and Fireman's Fund paying its $1,000,000 excess limit.  Plaintiffs were given an assignment of Sinco's rights against the Fireman's Fund CGL policy.  The settlement also provided for an arbitration on the merits of plaintiffs' claims.  At arbitration, plaintiff's' award was in excess of $27,000,000.  A finding was made that Bibinz was, at the time of the accident, acting within the course and scope of his employment under the "required vehicle" exception to the "going and coming" rule and that Sinco had been negligent in hiring and retaining Bibinz.  The arbitration award was confirmed and judgment was entered.

   Plaintiffs then sued Fireman's Fund for breach of the covenant of good faith and fair dealing and for breach of the insurance contract.  Plaintiffs alleged that Bibinz was not an insured because at the time of the accident, he was not performing duties related to the conduct of Sinco's business.  The trial court granted Fireman's Fund's motion to dismiss.

   Under the CGL policy, employees of Sinco were included as insureds, "but only for acts within the scope of their employment by you while performing duties related to the conduct of your business . . . ."  Excluded from coverage was bodily injury arising out of the ownership, maintenance, use or entrustment to others of an auto. 

   On appeal, the plaintiffs argued that "while Bibinz was considered, for purposes of tort liability, to be in the course and scope of his employment by virtue of the required vehicle exception to the going and coming rule, he was, for purposes of insurance coverage, on his way but had not yet gotten there, to perform duties related to conduct of Sinco's business."  Therefore, Bibinz was not an "insured" and the automobile exclusion in Fireman's Fund's policy did not apply.

   The court rejected this argument.  The allegations of the underlying complaint established that Bibinz was acting within the scope of his employment while performing duties related to the conduct of the business.  Therefore, he was an insured.

   Further, Fireman's Fund had no duty to defend.  There were no disputed facts.  Coverage, or lack thereof, depended on the interpretation of the policy - a legal question.  Plaintiffs argued that Fireman's Fund had a duty to defend because in the underlying action, there was a potential that the "going and coming" rule would apply.  When, however, the plaintiffs filed their complaint, they alleged that Bibinz was the agent of Sinco and acting within the course and scope of his authority.  Based on this allegation, Fireman's Fund had no duty to defend under the CGL policy.

Multiple Acts of Negligence Combining to Produce A Single Result Constitutes One Occurrence

   Whether a multiple vehicle accident creates separate occurrences, thereby increasing policy limits, was the issue in Auto-Owners Ins. Co. v. Munroe, 2010 U.S. Dist. LEXIS 15062 (7th Cir. July 22, 2010).

   Three trucks owned by Wayne Wilkins Trucking were traveling the highway in convoy.  All trucks were covered under a single policy issued by Auto-Owners.  The policy stated that the maximum total coverage was $1,000,000 regardless of how many vehicles were involved in an accident.

   Munroe sustained significant injuries when the three trucks collided.  Munroe sued the two other drivers for negligence and Wilkins for negligent hiring and training.  A partial settlement was reached whereby Munroe released Wilkins and the other drivers from any liability above their insurance coverage in exchange for $903,449, the remainder of the $1,000,000 coverage limit after property damage was paid to the owner of Munroe's truck.  The agreement stated Auto-Owners would seek a declaratory judgment that liability coverage was limited to $1,000,000.  Munroe reserved the right to proceed with his case if it was determined the policy limits exceeded $1,000,000.

   In Auto-Owners' declaratory judgment action against Munroe, the district court held the policy limited coverage to $1,000,000 for each occurrence.

   On appeal, Munroe argued the policy limit was $3,000,000 because there were three occurrences based on the separate negligent acts of each defendant.  The Seventh Circuit disagreed.  The policy clearly provided up to $1,000,000 of coverage per occurrence for each insured vehicle.  The only question was whether there was more than one occurrence.

   This case involved a single force and an uninterrupted chain reaction involving several vehicles, and thus a single continuous occurrence.   A single claim or injury did not give rise to multiple occurrences merely because several acts of negligence combined to produce a single result.  Because there was a single occurrence, the policy limited coverage to $1,000,000.

Motor Vechile Exclusion Bars Coverage Under Homeowner's Policy

   While operating heavy construction equipment, the insured's nine-year old son injured a worker.  The court considered whether the insurer had to defend and indemnify under a motor vehicle exclusion in the insured's  homeowner's policy.  See Rhoades v. Massachusetts Prop. Ins. Underwriting Assoc., 2010 U.S. Dist. LEXIS 69870 (D. Mass. July 13, 2010).

   The insured was the president of Feeney Corporation, a subcontractor at a construction site.  When visiting the construction site, the insured's son started operating a caterpillar "skid steer" owned by Feeney Corporation.  After placing skid steer in reverse, the son hit and injured Rhodes, an employee of a subcontractor of Feeney Corporation's. 

   When Rhoades sued the insured, Massachusetts Property refused to defend or indemnify based on a motor vehicle exclusion in the policy.  Rhoades secured a default judgment against the insured and an assignment of rights against Massachusetts Property.  Rhoades then sued the insurer.

   The court first determined that the skid steer was a motor vehicle under the policy.  The policy defined motor vehicle as a self-propelled land or amphibious vehicle.  There was no ambiguity.  The definition was sufficiently clear so that an objectively reasonable insured could not expect liability arising out of the use of a skid steer would be covered based on the motor vehicle exclusion.

   The policy had exceptions to the exclusion, however.  Motor vehicle liability was covered if the motor vehicle was "(a) in storage, (b) used solely to service an insured's residence, (c) designed to assist the handicapped, or (d) designed for recreational use off public roads."  None of the categories applied here. 

   Finally, despite the applicability of motor vehicle exclusion, the insured argued he was still entitled to coverage under the "train of events" test adopted by Massachusetts courts.  Under this test, if the efficient proximate cause of a loss was an insured risk, there would be coverage even though the final form of the property damage, produced by a series of related events, appeared to take the loss outside the terms of the policy.

   The train of events test did not apply here, however.  The test was only applicable when coverage under first party policies was at stake.  The Massachusetts Property policy was a third-party policy and Rhoades' injuries were caused by the insured themselves, not by a series of events.