Insurance Law Hawaii

Unit Owners Have No Standing To Sue Under Condominium Association's Policy

   If a condominium owner suffers damage caused by a leak from another unit, may it sue the insurer for the Association of Apartment Owner (AOAO) for coverage? The federal district court for Hawaii said "no" in a decision by Judge Mollway. See Peters v. Lexington Ins. Co., 2011 U.S. Dist. LEXIS 148734 (D. Haw. December 27, 2011).

   Two cases were consolidated. In each case, Plaintiffs owned condominium units at the Watercrest Resort on Molokai. Water leaking from another unit damaged Plaintiffs' units.

   Watercrest Resort was insured by Lexington pursuant to a policy maintained by the AOAO. Plaintiffs filed claims with Lexington. Lexington hired an adjustor.

   Unhappy with the adjustment of their claims, Plaintiffs sued Lexington and the adjustor. The AOAO was not named as a party. The first count of Plaintiffs' complaint was entitled, "Breach of the Insurance Agreement by Lexington." Count two sought punitive damages against Lexington and the third count sought punitive damages against the adjustor. Lexington moved for a judgment on the pleadings with respect to counts one and two.

   The court construed count one as a claim for breach of the policy between Lexington and the AOAO. Plaintiffs had no privity with Lexington, however, as they were not insureds under the policy. Therefore, Plaintiffs lacked standing to assert a breach of the policy.

   Plaintiffs also argued provisions in the Hawaii condominium statutes gave them standing. Section 514B-143 (b) of the Haw. Rev. Stat. required a homeowner's association to insure individual units. The statute was silent, however, on whether the owner of an individual unit could bring an action directly against the insurer to enforce an association's policy.

   Nor was there an implied private remedy granted by the statute to Plaintiffs. First, it was not clear that the statute was enacted to provide a special benefit to, or a right in favor of, the unit owners. Second, there was no indication that the Hawaii legislature intended to create a right of action for unit owners to enforce their AOAO's policy.

   In closing, the court noted that Plaintiffs had a remedy against the AOAO if they believed it was not vigorous enough in its dealings with Lexington for coverage on the damage.

   Special thanks to public adjustor, Robert Joslin of Hawaii Public Adjustors, for sharing this case during his recent address to the Hawaii State Bar Association's Insurance Coverage Litigation section.

Nevada Court Adopts Efficient Proximate Cause Doctrine

   Although the Nevada Supreme Court adopted the efficient proximate cause doctrine, it determined it did not apply to salvage coverage under an all-risk policy for a rain-damaged building. Fourth Street Place, LLC v. The Travelers Indemn. Co., 2011 Nev LEXIS 114 (Nev. Dec. 29, 2011).

   Fourth Street owned an office building which was insured by an all-risk policy issued by Travelers. Fourth Street hired Above It All Roofing to repair the roof of the office building. Above It All removed the waterproof membrane on the roof and prepared to replace the membrane the following week. Over the weekend, however, substantial rain hit. On Sunday, Above It All returned to cover the exposed portions of the roof with tarps, but wind later blew the tarps away. The building suffered significant interior damage as it continued to be exposed to the rain.

   Fourth Street notified Travelers, who denied the claim. Fourth Street sued. The trial court granted Traveler's motion for summary judgment. The court found the rain damage did not result from a "Covered Cause of Loss" because the building did not first sustain actual damage to its roof or walls by wind or hail, as required by the Policy before coverage of damage caused by rain was invoked. Further, the doctrine of efficient proximate cause did not apply because neither cause of loss - Above It All's faulty workmanship or the rain - was a covered cause of loss under the policy.

   The Nevada Supreme Court affirmed. The Limitations section of the policy stated there was no coverage for damage to the interior of a building unless the building first sustained actual damage to the roof or walls by wind or hail. The tarps used to cover the building did not constitute a "roof" for purposes of the Policy's rain limitation.

   Second, the policy excluded damage caused by or resulting from faulty workmanship, unless the faulty workmanship resulted in a covered cause of loss. Here, by leaving for the night without covering the exposed portions, Above It All allowed rainwater to damage the building. Because the building did not "first sustain actual damage to the roof . . . by wind or hail," the rain that caused the damage was not a covered cause of loss.

   Finally, the court determined the efficient proximate cause doctrine was not applicable under these facts. Under the doctrine, where covered and noncovered perils contribute to a loss, the peril that set in motion the chain of events leading to the loss or the "predominating cause" was deemed the efficient proximate cause or legal cause of the loss. Here, neither cause of loss (the rain and faulty workmanship) was a covered cause of loss. Accordingly, the doctrine did not provide relief here. Nevertheless, the court joined the majority of jurisdictions by adopting the doctrine of efficient proximate cause in Nevada.

Business Interruption Coverage Denied Where Portion of Business Remains Open

   When only a portion of a hotel was closed after damage was caused by Hurricane Ike, the court determined there was no coverage for business interruption. H&H Hospitality LLC v. Discovery Specialty Ins. Co., 2011 U.S. Dist. LEXIS 146055 (S.D. Texas Dec. 20, 2011).

   Strong hurricane winds caused damage to the hotel, including the loss of part of the roof on one of its buildings. Approximately 40 hotel rooms were unusable after the storm. The hotel, however, had some undamaged, rentable rooms which were rented continuously after the storm. The hotel claimed business interruption losses of $293,191.00, but the insurer only paid $51,971.02.

   The policy stated, in part, business interruption damages would be paid during "the necessary suspension of your operations." The insurer argued this meant a complete cessation or stoppage of business activities. The hotel countered that consideration should be given to the nature of the premises at issue in determining what constituted a "necessary suspension of operations."

   The court noted that the policy did not define "necessary suspension of your operations." Other courts, however, had interpreted indentical or similar language to cover the risk of a complete cessation of business activities at the covered premises. The business interruption provision in other policies provided coverage for the "necessary interruption of business, whether total or partial." When faced with this language, courts allowed coverage for a partial cessation of business without requiring a total business shut down.

   Here, however, the policy lacked such qualifying language to cover the risk of "potential" or "partial" suspension. Thus, the hotel's argument that its policy provided coverage for its reduced business operations, or a partial suspension, lacked support in the plain language of the policy. Accordingly, the insured was entitled to summary judgment on the hotel's business interruption claim.

Application of Efficient Proximate Cause Doctrine Supports Coverage

   Relying on the efficient proximate cause doctrine, the court determined coverage potentially existed for damage caused by water. Union Sav. Bank v. Allstate Indem. Co., 2011 U.S. Dist. LEXIS 134398 (S.D. Ind. Nov. 21, 2011).

   The Tods purchased property that was mortgaged by Union Savings. The Tods obtained a Landlords Policy for the property from Allstate. When the Tods were in default on their loan, Union Savings notified them that foreclosure proceedings would commence. Union Savings sent an appraiser to the property who discovered water in the basement. Water and electricity to the building were off. Union Savings notified Allstate and later filed a formal claim under the mortgagee clause in the Landlords Policy. This clause stated, "A covered loss will be payable to the mortgagees named on the policy declaration. . . ." 

   Allstate denied coverage, citing exclusions for water damage. The policy excluded coverage for a loss consisting of or caused by "water or any other substance that overflows from a sump pump." Suit was filed, followed by cross motions for summary judgment.

   Allstate's investigator concluded that the water damage was the result of a lack of power to the sump pumps for extended periods. Union Savings asserted that the sole cause of the damage was the Tods' negligence in paying their electricity bills, resulting in an electrical shut down which cased the sump pump failure, and ultimately, water damage. Allstate contended the water damage caused by the overflowing sump pump was an intervening event that broke the causal chain started by the Tods' failure to maintain electric service to the house. However, under the efficient proximate cause theory, the water event that occurred after the causal chain was set in motion was simply an effect of the insured risk. Accordingly, if the Tods' failure to maintain electric service to the property was an insured risk, then the claimed loss was covered if it was caused by such failure.

   Therefore, to the extent that the damage was caused by the Tods' failure to maintain electricity to the Property, the Landlord's Policy provided coverage to the mortgagee, Union Savings. Allstate's motion, seeking a determination that the policy did not provide coverage for Union Savings' claimed loss, was denied.

Economic or Physical Loss Not Required to Recover Emotional Distress Damages Caused by Bad Faith

   In perhaps its most significant insurance coverage decision since Young v. Allstate, 119 Haw. 403, 198 P.3d 666 (2008), the Hawaii Supreme Court ruled that an insured need not prove economic or physical loss caused by the insurer's bad faith in order to recover emotional distress damages. See Miller v. Hartford Life Ins. Co., 2011 WL 6811570 (Haw. Dec. 28, 2011).

   Hartford issued a long-term care policy to Penelope Spiller. In 2007, after she suffered a seizure and was diagnosed with lung cancer that metastasized to her brain, Hartford determined she was eligible for benefits. A year later, however, her benefits were terminated. Hartford determined Ms. Spiller was no longer "cognitively impaired" or incapable of performing two Activities of Daily Living as required by the policy.

   Thereafter, Ms. Spiller repeatedly sought reinstatement of her benefits. Phone conversations between Ms. Spiller and a Hartford employee became increasingly contentious. Hartford denied an internal appeal of the termination of benefits.

   On January 23, 2009, however, benefits were restored. Nevertheless, in July 2009, Ms. Spiller sued in state court for bad faith, negligence, and intentional infliction of emotional distress. She sought damages for the emotional distress incurred during the period that her benefits were denied, together with punitive damages.

   The case was removed to federal court. The district court issued certified questions to the Hawaii Supreme Court. The Hawaii Court addressed one of the questions, revised to read, "If a first-party insurer commits bad faith, must an insured prove the insured suffered economic or physical loss caused by the bad faith in order to recover emotional distress damages caused by the bad faith?"

   The Hawaii Supreme Court first surveyed its jurisprudence on bad faith. Under the leading case, Best Place, Inc. v. Penn Am. Ins. Co., 82 Haw. 120, 920 P.2d 334 (1996), and subsequent cases, the Court intended to provide the insured with a vehicle for compensation for all damages incurred as a result of the insurer's misconduct, including damages for emotional distress, without imposing a threshold requirement of economic or physical loss.

   Nonetheless, Hartford urged the Court to rely on California law, under which economic or financial loss was required before an insured could recover emotional distress damages for bad faith. Ms. Spiller, on the other hand, urged the Court to follow Colorado's lead in rejecting California's economic loss requirement for the recovery of emotional distress damages in insurer bad faith actions. In Goodson v. Am. Standard Ins. Co. of Wisconsin, 89 P.3d 409 (Colo. 2004), the Colorado court held that in a tort claim against an insurer for bad faith, the insured could recover damages for emotional distress without proving substantial property or economic loss. Otherwise, the insurers would be encouraged to unreasonably refuse to pay, or delay payment of, a valid claim and then avoid liability for bad faith emotional distress damages by making payment at the last minute.

   The Hawaii Supreme Court determined the Colorado view was more compatible with Best Place. In Best Place, the Court made clear its intent to make available to the insured a broader range of compensatory damages, including damages for emotional distress, that were generally not available in actions based solely on breach of contract.

Florida Court Prevents Simultaneous Trial of Breach of Contract And Bad Faith Issues

   Landmark American Insurance Company successfully moved to dismiss four of the insured's six counts. Landmark Am Ins. Co. v. Studio Imports, Ltd., Inc., Nos. 4D10-5001 and 4D10-5073 (Fla. Dist. Ct. App. Nov. 16, 2011). The trial court did not dismiss the breach of contract claim and the bad faith claim. Because both claims were to be tried simultaneously, Landmark appealed.

   The back story included extensive damage to the insured's commercial property caused by Hurricane Wilma in 2005. The insured claimed Landmark took too long to reimburse for losses, which caused additional damages, such as loss of good will, a damaged reputation with customers, and ruined business relationships.

   The appellate court agreed the breach of contract and bad faith claims could not be tried together under Florida law. Where causes of action for both the underlying damages and bad faith were brought in the same action, the appropriate method was to abate the bad faith action until coverage and damages were determined. Consequently, the trial court order was reversed so the underlying issue could be determined prior to the bad faith claim.

All Risk Policy Only Covers Repair to Portion of Dock That Sustains Damage

   A portion of a dock on Lack Michigan operated by the Ports of Indiana suffered visible damage. See Ports of Indiana v. Lexington Ins. Co., 2011 U.S. Dist. LEXIS 130979 (S.D. Ind. Nov. 14, 2011). Lexington Insurance Company insured the port. Lexington agreed that a portion of the dock was damaged and paid $1.2 million for repairs. A dispute arose, however, over whether additional sections of the dock were damaged and whether the damage was the result of more than one "occurrence."

   An expert report opined that a significant drop creating record lows in the water level of Lake Michigan in 2007 caused damage to the dock. Lexington maintained that only 128 feet of the dock was damaged; other portions of the dock did not sustain "direct physical loss or damage." Accordingly, Lexington claimed it had no obligation to pay for work performed on other portions of the dock. Ports spent more than $9 million on dock repair and replacement costs and expected to spend another $2.5 million. The Lexington policy covered $10 million per "occurrence."

   Addressing Ports' motion for summary judgment, the court noted that the insured had to prove it suffered a covered loss under the all risk policy before the burden shifted to the insurer to show an exclusion barred coverage. Therefore, Ports had to show a fortuitous "direct physical loss or damage" to the covered property in order to trigger coverage. Here, the allegedly damaged dock section continued to be in active use until those sections underwent rehabilitation. This evidence created a question of material fact as to whether the entire dock had suffered direct physical damage or loss.

   Regarding the number of "occurrences," an issue raised by Lexington's motion for summary judgment, the policy stated "occurrence" meant "any one loss, disaster, casualty or series of losses, disasters or casualties, arising out of one event." Here, Ports claimed that the unusually low water level was the key factor which, in concert with other natural events, caused the damage to the dock. The low lake level was a continuous or ongoing event. Accordingly, the damage incurred were the result of a single occurrence, entitling Lexington to summary judgment on this issue.

 

Eighth Circuit Remands To Determine Applicability of Collapse Exclusion

   The Eighth Circuit determined a jury instruction regarding the applicability of the "all-risk" policy's exclusion for "collapse" was inadequate. See KAAPA Ethanol, LLC v. Affiliated FM Ins. Co., 2011 U.S. App. LEXIS 22158 (8th Cir. Nov. 3, 2011).

   KAAPA had nine large, cylindrical, stainless steel tanks fabricated at its location. Soon after operations began in 2003, some of the tanks experienced unusual movement and began to shift. A geotechnical engineer found "silty clay" had been used for infill instead of compacted granular fill called for in engineering drawings. A year long plan to repair all nine tanks was implemented.

   Affiliated's "all-risk" policy excluded damage caused by faulty workmanship. It also excluded damage caused by settling or cracking. The settling exclusion went on to provide, "This exclusion will not apply to loss or damage resulting from collapse of: a building or structure; or material part of a building or structure." Affiliated denied coverage because of the faulty workmanship and settling exclusions.

   After the jury found that some of KAAPA's losses were caused by an excluded peril and some were caused by collapse, the court upheld the award of nearly $4 million for losses caused by collapse.

   On appeal, Affiliated argued the district court erred in instructing the jury when a collapse occurs under Nebraska law. Affiliated's proposed instruction would have required proof that an actual collapse was imminent or that the structure was unsafe or unstable. Affiliated objected to the district court eventual instruction, which provided,

"Collapse" means substantial impairment of the structural integrity of a building or any part of a building. A structure or part of a structure does not need to fall down or be in imminent danger of falling down in order for it to have "collapsed," nor do you need to find that the structure was either abandoned or taken out of use.

   Regarding the phrase "imminent danger," the Eighth Circuit predicted that the Nebraska Supreme Court would adopt an imminence requirement. It was an error of law to instruct the jury to disregard the imminent factor altogether.

   Affiliated also objected the abandonment criteria in the instruction. Here, the Eighth Circuit determined there was no error. The court felt the Nebraska Supreme Court would conclude it is not necessary or essential to a finding of collapse that a structure be taken out of service or rendered uninhabitable, especially where the policy's coverage included coverage of a material part of a building.

 

 

Ensuing Loss Provision Does Not Salvage Coverage

   Water intrusion caused by a contruction defect was not covered under the all risk policy's ensuing loss provision. See Friedberg v. Chubb & Son, Inc., 2011 U.S. Dist. LEXIS 123582 (D. Minn. Oct. 25, 2011).

   Extensive water damage was discovered in the insureds' home when a small hole in the exterior wall was being repaired. Chubb's adjuster and an expert found water intrusion causing rot, mold, and damage to the home's wood framing and insulation. Chubb denied coverage because water intruded through the roof and wall, resulting in gradual deterioration. The insureds filed suit.

   The policy excluded coverage for construction defects, but insured "ensuing covered loss unless another exclusion applies." 

   The court agreed there was a prima facie case for coverage because the home suffered a physical loss. The burden, therefore, shifted to Chubb to show the exclusions were applicable.

   The insureds argued they were entitled to coverage because Chubb could not show that the overriding cause of the loss was faulty construction. But the experts agreed that a construction defect had allowed water to enter the residence. The water intrusion was not independent of the construction defect. Therefore, it was unreasonable to conclude that the construction defect was not the overriding cause of loss.

   Finally, the ensuing loss provision did not restore coverage. Without faulty design and workmanship, water would not have entered the residence. With faulty construction, water damage was inevitable. Therefore, there was no separable and distinct peril that led to deterioration, rot and warping. Consequently, Chubb was entitled to summary judgment.

Homeowner's Policy Excludes Coverage for Loss Caused by Chinese Drywall

   Exclusions barred the homeowners from recovering for losses caused by Chinese drywall in their home. Ross v. C. Adams Const. & Design, L.L.C., 2011 La. App. LEXIS 769 (La. Ct. App., released for publication Oct. 5, 2011).

   Two years after purchasing their home, the Rosses began experiencing chronic malfunctions in the heating, ventilation and air conditioning system. After discovering the presence of gypsum drywall, or "Chinese drywall", the submitted a claim to their insurer, Louisiana Citizens Property Insurance Company, for damages caused by the Chinese drywall. Louisiana Citizens denied the claim.

   The Rosses sued. The trial court granted summary judgment to Louisiana Citizens based upon exclusions in the policy.

   On appeal, the appellate court first agreed the Rosses had sustained a direct physical loss. The inherent qualities of the Chinese drywall created a physical loss to the home and the drywall had to be removed and replaced.

   The court then turned to the various exclusions relied upon by Louisiana Citizens. First, the policy excluded loss caused by faulty, inadequate or defective materials used in repair. The Rosses argued the Chinese drywall was not faulty, inadequate, or defective because it functioned as drywall and served its intended purpose. The court disagreed. The plain meaning of "faulty, inadequate or defective" material led to a conclusion that the drywall was a faulty, inadequate or defective material and was specifically excluded by the policy.

   Next, the court agreed with Louisiana Citizens that the Chinese drywall was a latent defect that was hidden and unknown for two years. Therefore, the exclusion for latent defects was applicable.

   The policy also excluded loss caused by corrosion. Allegations in the Ross' petition that the emission of gases from the drywall caused corrosion of the components in their home made this exclusion applicable.

   Finally, the pollution exclusion barred coverage. The sulfuric gas emitted from the drywall qualified as a pollutant under the policy's definition.

   The Rosses also sought damaged for various contents of their home allegedly damaged by the Chinese drywall. The policy only covered loss to personal property when one of the sixteen specified perils listed in the policy existed. The emission of sulfuric gases from the drywall was not one of the listed perils.

   Therefore, the claims submitted by the Rosses were not covered under the policy.