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.

Insurer's Summary Judgment Motion Denied Where Property's Value at Issue

   The insured's home was extensively damaged by wind and rain resulting from Hurricane Katrina.   See Belonga v. Auto Club Family Ins. Co., No. 09-476, 2009 U.S. Dist. LEXIS 118643 (E.D. La. Dec. 21, 2009).  When purchased in 2003, the home was appraised at $114,000.  An adjuster addressing the insured's flood claim reported, however, the home had a cash value of $190,000.

   The insured held a homeowner's policy issued by Auto Club.  She filed suit seeking payment of her full policy limit for damage to dwelling, plus other structures and contents.  She had received only $25,870 for wind damage to her residence and $2,932 for wind damage to other structures.  Pursuant to a flood policy, the insured also received $94,000 for flood damage to her dwelling.  Therefore, the insured had received a total of $119,870 for damage to her home caused by flood, wind, and wind driven rain. 

   Due to contested issues of fact, Auto Club's motion for summary judgment was denied.  The insured was entitled to recover any previously uncompensated losses that were covered by her homeowner's policy and which, when combined with her flood proceeds, did not exceed the value of her property.  The value of the insured's property was a material fact.  The insured had submitted a report indicating the cash value of her home was $190,000, an amount exceeding the total amount of insurance proceeds she had received.

   Further, although the insured had testified in her deposition that she was not pursuing damages for other structures, her expert's report stated there had been hurricane-related damage to the insured's other structures.  The court discounted the deposition testimony, which likely resulted from her lack of understanding of her policy and not from an intent to abandon her claim for damage to other structures. 

Failure to File Proof of Loss Reduces Coverage Under Flood Policy

   If the insurer pays for adjusted flood damage, can the insured sue for additional coverage when no proof of loss is filed?  Following its own precedent, the Fifth Circuit determined no coverage was due above the adjusted amount when the insured failed to file a proof of loss ("POL").  See Talbott v. Fidelity Nat. Ins. Co., No. 09-30028, 2009 U.S. App. LEXIS 26728 (5th Cir. Dec. 8, 2009).

   The insured purchased a Standard Flood Insurance Policy ("SFIP") from Fidelity.  The policy covered the insured's two story property in New Orleans.  The policy specifically stated there was "no basement" in the property. 

   Hurricane Katrina damaged the insured's property on August 29, 2005.  The insured filed a claim for flood-related property damage five days after the storm.  On November 1, 2005, an adjuster determined the exterior damage was $10,697.68, which Fidelity paid.  Subsequently, another $2,480.90 was paid by Fidelity for interior damage and contents.  Finally, on April 3, 2007, Fidelity sent the insured a check for $419.80 to cover adjusted interior and contents damage.

   On March 26, 2007, Fidelity retroactively changed the property description from stating "no basement" to "basement enclosure unfinished." 

   The insured sued Fidelity, claiming it failed to properly adjust the claim by paying only a fraction of the total property damage.  Prior to filing suit, however, the insured failed to submit a POL in accordance with the SFIP.  Although Fidelity argued the failure to file a POL excused any obligation owed under the policy, the insured contended that Fidelity repudiated the policy on March 26, 2007, when the basement description was altered, thereby relieving the insured from filing a POL.  The district court held in favor of Fidelity, holding that the failure to file a POL meant the insured was not entitled to any payment above the amount Fidelity determined was owed.

   The Fifth Circuit affirmed. Regulations implementing the SFIP required the insured to file a POL within sixty days after the loss occurred.  The Fifth Circuit had consistently held that when the insured fails to file a POL, the insurer is relieved of its obligation to pay an otherwise valid claim.  However, case law also established that repudiation of a policy relieved the insured from the obligation to file a POL. 

   Here, there was no repudiation.  The insured had to show that the insurer owed coverage that it refused to provide.  Fidelity agreed the insured had coverage, but disputed the amount of loss.  Because there was no repudiation, the insured was required to file a POL.

Dispute Over Flood Policy Raises Federal Question, Preserving Federal Court's Jurisdiction

   The insured's Standard Flood Insurance Policy (SFIP) was issued by Allstate, a Write-Your-Own carrier participating in the National Flood Insurance Program (NFIP).  See Borden v. Allstate Ins. Co., No. 08-30515, 2009 U.S. App. LEXIS 25599 (5th Cir. Nov. 20, 2009).  After suffering flood damage from Hurricane Katrina on August 20, 2005, the insured filed a claim.  Allstate denied coverage, contending the policy expired on July 8, 2005, due to failure to pay the premium. 

   The insured, a Louisiana citizen, sued Allstate in state court, alleging that he never received the annual renewal notice.  Allstate, an Illinois citizen, removed the case to federal court based on diversity jurisdiction.  The insured subsequently joined Allstate's agent, Ruiz, also a Louisiana citizen, as a defendant.  Allstate did not object, but later filed a motion for summary judgment and further moved for the court to clarify its subject matter jurisdiction.  The district court granted Allstate's motion for summary judgment and dismissed claims against both defendants without addressing Allstate's motion on subject matter jurisdiction.

   On appeal, the Fifth Circuit agreed diversity jurisdiction did not exist because both the insured and Ruiz were Louisiana citizens.  The fraudulent joinder doctrine, which ensures that an improperly joined, non-diverse defendant does not defeat federal removal jurisdiction, did not apply to joinders occurring after removal to federal court.

   The district court did, however, have federal question jurisdiction.  Federal law applied to a dispute under a NFIP policy.  An action for breach of an SFIP raised a substantial question of federal law, thereby meeting the federal jurisdictional hurdle.

   The grant of summary judgment in favor of Allstate was vacated, however.  The policy gave the insured one year to notify Allstate of non-receipt of a renewal notice.  Although the insured's affidavit claimed that his non-receipt of a renewal notice was timely reported, the district court overlooked this point.  Therefore, the district court was instructed on remand to adjudicate the insured's claim.

Allegations of Insurers' Fraud for Katrina Flood Claims Survive Motion to Dismiss

   In an opinion primarily concerned with the intricacies of pleading under the False Claims Act, the Louisiana federal district court addressed allegations that insurers shifted Katrina claims from homeowners' to flood policies.  See United States ex rel. Branch Consultants, L.L.C. v. Allstate Ins. Co., No. 06-4091, 2009 U.S. Dist. LEXIS 101155 (E.D. La. Oct. 19, 2009). 

   The case centered on "Write Your Own" ("WYO") flood policies, which allow private insurers to issue standard, government-guaranteed flood insurance policies in their own names.  Private insurers then act as fiscal agents of the United States and are responsible for adjustment, settlement, payment and defense of claims under the policies.  Payments under the policies, however, are ultimately made by the United States.  The government paid approximately 162,000 Katrina-related flood damage claims by May 2006.  Given the strain of processing so many claims, standards for submitting proofs of loss were relaxed.  When policyholders did not dispute the insurer's adjustment, the proof of loss requirement was waived and the claim was paid on the basis of the adjuster's report.

   Plaintiff Branch Consultants sued on behalf of the United States under the False Claims Act the WYO insurers and adjusters who were involved in the adjustment of flood claims after Katrina.  Branch alleged that defendants moved the costs of paying for wind damage to the government by fraudulently claiming that the damage was caused by flood.  Defendants moved to dismiss because the suit was based upon a public disclosure of the fraud and Branch was not the original source of its allegations, as required by the False Claims Act.

   To resolve the motion to dismiss, the court canvassed the specific allegations and the extent to which the public had previously been made aware of the alleged fraud.  For example, a FEMA administrator had testified before a Senate committee about the conflict of interest arising from the structure of the WYO program because the insurers had the opportunity and incentive to overstate flood damage to covered properties at the expenses of taxpayers.  Louisiana Representative Gene Taylor had testified before a House committee about the same conflict of interest issues.  This led to passage of legislation authorizing an investigation into whether the WYO insurers improperly attributed damage from Katrina to flooding covered under flood policies rather than to windstorms covered by policies issued by the insurers.  SeeDepartment of Homeland Security Appropriations Act, Pub. L. No. 190-295 (2006).  The defendants also noted news reports covering the alleged fraud.  Given the congressional and administrative testimony and media coverage that preceded Branch's complaint, the allegations had been publicly disclosed for purposes of the FCA.

   Nevertheless, a suit based upon a public disclosure was not barred under the FCA if the realtor was the original source of the information in its complaint.  Here, the complaint established direct knowledge of the fraud because of the realtor's own efforts.  The complaint described in detail the results of Branch's examination of 57 properties, listing each address, the insurer, a description of the damage, the amount of flood insurance paid, and Branch's determination of the actual amount of flood damage.  Consequently, Branch had both direct and independent knowledge of the information upon which its allegations were based.  It therefore qualified as an original source for purposes of the FCA and the Court was not deprived of jurisdiction.

   Because claims against three adjusters failed to sufficiently allege fraud, however, they were dismissed without prejudice.  Branch was given the opportunity to amend its complaint to allege an adequate factual basis for its allegations against these adjusters.  As to the other defendants, Branch had pleaded the existence of a broad scheme to defraud the government and provided numerous individual examples that were allegedly part of the scheme. Therefore, the remainder of the motion to dismiss was denied.

   This promises to be an interesting case which will be worth keeping an eye on it as it develops.

Statute of Limitations for Katrina Claim not Tolled by Insurer's Negotiations

   In Landry Architecture, LLC v. Valley Forge Ins. Co., No. 09-3974, 2009 U.S. Dist. LEXIS 99109 (E.D. La. Oct. 23, 2009), the insured's claims for business income losses resulting from Hurricane Katrina and breach of the implied covenant of good faith and fair dealing did not survive the insurer's motion to dismiss on statute of limitations grounds.  

   The insured purchased a property policy from Valley Forge in August 2002.  The policy was renewed on an annual basis thereafter.  In June 2002, Valley Forge issued a notice that Landry's policy would no longer cover business income loss resulting from windstorm or hail.  The insured renewed its policy in August 2004 and again in August 2005.  Therefore, the policy in effect during Hurricane Katrina was in place almost four years before the insured filed suit. 

   Valley Forge tendered $32,741 in February 2009, but denied claims for business income loss.  The insured filed suit on May 29, 2009.  Valley Forge moved to dismiss based on a two year statute of limitations for Katrina-related claims.  The district court noted that Hurricane Katrina struck August 29, 2005, at which point the prescriptive period began to run.  The insured's claims, filed four years later, were therefore barred on the face of the complaint.

   The insured raised various theories to argue the statute of limitations was tolled.  The court disagreed with each.  First, Valley Forge's investigation, adjustment, and negotiation of the claim did not toll the prescription period under Louisiana law.  Second, the tender of $32,741 did not interrupt or toll the prescriptive period.  Third, the insured's bad faith count could not survive even though it was not based upon a claim for breach of an insurance contract.  Under a Louisiana statute, a litigant had to first have a valid, substantive underlying claim upon which insurance coverage was based in order to pursue a bad faith claim.

   Interestingly, this third claim would probably survive a motion to dismiss on similar grounds in a Hawai`i court.  Under Hawai`i law, an insurer can breach the implied covenant of good faith and fair dealing even if benefits are not due and owing under the policy.  See The Best Place, Inc. v. Penn Am. Ins. Co.,82 Hawai`i 120, 133, 920 P.2d 334, 347 (1995)(quoting Rawlings v. Apodaca, 726 P.2d 565, 573 (Ariz. 1986)("The implied covenant is breached, whether the carrier pays the claim or not, when its conduct damages the very security which the insured sought to gain by buying insurance"); Wailua Assoc. v. The AETNA Cas. & Sur. Co., 27 F. Supp. 2d 1211, 1220 (D. Haw. 1998)(bad faith delay in appraising and investigating claim).

Settlement for Hurricane Destruction Not Upset by Insurer's Additional Payment

   Can an insured who settles with the insurer pursuant to a mediation program later reject the settlement and seek additional coverage?  The Fifth Circuit denied such relief to the insured in Wiley v. State Farm Fire and Cas. Co., No. 09-60191 (5th Cir. Oct. 9, 2009).

    The insured's home was reduced to a slab by Hurricane Katrina.  State Farm rejected his claim based on the water damage exclusion and anti-concurrent cause provision in the policy.  The parties, however, entered the Mississippi Department of Insurance Hurricane Katrina Mediation Program, and in 2006 signed a settlement agreement.  After being told by State Farm that his entire claim would be denied because his home had been destroyed by storm surge, the insured released all known claims in exchange for $80,235. 

   In a 2007 letter, State Farm offered an additional $26,798 in exchange for another release after an agreement between State Farm and the Mississippi Department of Insurance was reached.  The insured rejected the second offer and brought suit to recover additional sums under his homeowner's policy.  The insured claimed he had learned that wind, and not solely storm surge, had caused part of the damage to his home.  Nevertheless, the district court granted summary judgment to State Farm.

   The Fifth Circuit affirmed.  The 2006 Settlement unambiguously represented a "full, complete and total final payment" for all insured damages that were known to the insured at the time of the settlement.  The 2007 offer was not an admission by State Farm that the original payment was incorrect, but preserved the status quo established by the 2006 settlement.  Further, the 2007 letter and additional payment offer was issued pursuant to negotiations between State Farm and state regulators, and the insured was not a party to the negotiations. 

  

Corban Presents Well-Reasoned Analysis of Anti-Concurrent Causation Clause

   Having now read the full Corban decision, I am impressed with the clarity of the analysis set forth in the opinion.  See Corban v. United Services Automobile Assoc., 2009 Miss LEXIS 481 (Miss. Sup. Ct. Oct. 8, 2009).  The Mississippi Supreme Court carefully considered the facts, offered a common sense analysis to the anti-concurrent causation clause, and determined the provision had no application to the facts at hand.  The case has implications for Hawai`i because homeowners' policies issued here typically include an anti-concurrent causation clause.

    The Corban's home suffered significant damage from Hurricane Katrina.  They held both homeowner's and flood policies with USAA, and submitted a claim for $1,607,926.  USAA hired an engineer who determined all of the first floor damage was caused by flood.  Therefore, coverage was limited to replacing the roof and repairing some of the damage around the house.  The Corbans eventually received $433,903.77 from USAA (the maximum payment of $350,000 under the flood policy and $83,903.77 under the homeowner's policy), leaving $1,174,022 in claimed losses unsatisfied.

   When the Corbans sued, USAA's motion for partial summary judgment was granted.  The trial court judge found "storm surge" was within the definition of "water damage" and therefore an excluded peril.  The anti-concurrent causation clause was unambiguous, but barred coverage for any damage caused by water or caused concurrently or sequentially by wind and water in combination.

    The Corbans filed an interlocutory appeal.  The Mississippi Supreme Court considered three issues: (1) did the trial court err in finding that "storm surge" was included in the "water damage" exclusion; (2) did the trial court err in finding that the anti-concurrent causation clause was applicable; (3) which party bore the burden of proof?

   The Supreme Court rejected the Corban's argument that "storm surge" was a covered peril because it was not included in the definition of "water damage."  "Storm surge" was plainly encompassed within the "flood" or "overflow of a body of water" portions of the policy's "water damage" exclusion.

   The Court next focused on the anti-concurrent causation clause, which excludes listed categories of loss "regardless of any other cause or event contributing concurrently or in any sequence to the loss."  The terms analyzed by the Court were "loss," "concurrently," and "in any sequence."

   Regarding "loss," the Court criticized other courts, including the Fifth Circuit Court of Appeals, for conflating the terms "loss" and "damage."  "Loss" typically follows "damage" to property.  Policies do not cover or exclude "damage," but focus on coverage or exclusion of "loss."  The insured's right to be indemnified for a covered loss vests at the time of loss.  Here, the Corbans were entitled to recover for all covered "direct, physical losses" to the property, unless excluded.

   The Mississippi Supreme Court shined in its analysis of the term "concurrently."  The Court reasoned the anti-concurrent causation clause only applied when perils acted in conjunction, as an indivisible force, occurring at the same time, to cause direct physical damage resulting in loss.  Under such circumstances, the Court accepted the Fifth Circuit's interpretation of the clause to exclude coverage.  The facts presented in the Corban case, however, did not include an "indivisible" force (wind and flood), occurring at the same time, causing direct physical damage resulting in simultaneous loss to the property.  Here the perils (wind and flood) acted in sequence, not concurrently, i.e., at different times, causing different damage, resulting in separate losses.

   Next, the Court found the phrase "in any sequence" in the policy troubling.  Because loss occurred when the insured suffered deprivation of physical damage to property, the phrase "in any sequence" could not divest an insured's right to indemnity for a covered loss.  This interpretation was consistent with other provisions in the policy which clearly stated indemnity to the insured was established at the time of the loss.

    Considering all of these key terms in the anti-concurrent causation clause together, the provision did not apply here.  The same loss with multiple causes, some covered (wind) and some not (flood), was simply not at issue.  

   Finally, the court considered the burden of proof.  Under "Coverage-A - Dwelling" and "Coverage B - Other Structures," the Corbans were required to prove a "direct, physical loss to property."  Thereafter, USAA had the burden to prove, by a preponderance of the evidence, that the causes of the losses were excluded by the policy, i.e., flood damage.  USAA had to indemnify the Corbans for all losses which USAA could not establish, by a preponderance of the evidence, to have been caused or concurrently contributed to by flood damage.

   With these straight-forward interpretations of the policy provisions, the case was remanded for trial.  It is not surprising that the Mississippi Supreme Court repeatedly referred to and complimented another well-reasoned decision interpreting the anti-concurrent causation clause, Judge Senter's decision in Dickinson v. Nationwide Mut. First Ins. Co., 2008 WL 1913957 (S.D. Miss. 2009) [reviewed here].  Together, the Corban and Dickinson decisions suggest it will be a rare case in which the anti-concurrent causation clause actually applies to deny coverage.   It is difficult to imagine circumstances under which multiple perils (wind and flood) act concurrently to cause the same property damage. 

Mississippi Supreme Court Rules Anti-Concurrent Causation Clause Inapplicable

   The Biloxi Sun Herald reports here that the Mississippi Supreme Court reversed today the trial court in Corban v. United Serv. Auto., No. 2008-IA-00645-SCT (Miss. Sup. Ct. Oct. 8, 2009).  We previously reviewed the Corbin case here, here and here.  The unanimous decision of the Mississippi Supreme Court is here. 

   One important issue before the Court was the impact on the anti-concurrent causation clause.  The trial court had ruled the anti-concurrent causation clause was to be applied as interpreted by the Fifth Circuit Court of Appeals, thereby barring coverage for damage caused by water or caused concurrently or sequentially by wind and water.  The Mississippi Supreme Court reversed, holding the anti-concurrent causation clause was inapplicable in Corban because the wind and water losses were separate or in sequence, not one indivisible force.  The case now goes back to the trial court.

   More to follow on Corban after an opportunity to review the opinion.   

Flood Damage Not Covered Where Insured Fails to File Proof of Loss

   In Schubert v. Chertoff, No. 07-5075, 2009 U.S. Dist. LEXIS 75835 (E.D. La. Aug. 26, 2009), the court considered whether the insured's failure to file a proof of loss for flood damage should be excused because two previous, untimely proofs of loss were accepted.

   The insured had a Standard Flood Insurance Policy through Hartford Fire Insurance Company on his New Orleans home.  Coverage limits were $250,000.  The insured's home suffered flood damage from Hurricane Katrina.  An independent adjuster estimated damages to be $91,059.58.  Hartford issued a check for this amount to the insured.

   Thereafter, the insured sought additional coverage for structural damage to the property.   The structural damage was not covered because it was not flood related, but an additional payment of $20,369.30 was recommended by the adjuster for damages overlooked in the first estimate.  FEMA waived the policy's 60-day proof of loss provision, but limited the waiver to only the amount of the loss stated.  Hartford then approved this additional payment.  Subsequently, a third payment was recommended by the adjuster for an additional $40,432.92.  FEMA again granted a waiver of the 60-day period, but limited the waiver for only the amount of loss outlined in the request.  Thereafter, Hartford paid an additional  $40,432.92 to the insured.

   The insured then sued Hartford, seeking damages for various additional items including fees paid, depreciation and "other items not yet determined."  No proof of loss was submitted for these items, but after suit was filed the insured sent Hartford an estimate for $13,570.90 for repairs to the home.   Hartford moved for summary judgment, arguing the insured was not entitled to additional damages sought because she had failed to provide a proof of loss.

   The district court granted Hartford's motion.  Under the National Flood Insurance Program, a policyholder seeking payment under a flood policy had to submit a proof of loss within 60 days of the loss.  Failure to provide the proof of loss statement relieved the federal insurer's obligation to cover the loss.  Here, the insured had not proof of filing a third proof of loss for the damages for which she sued.  The two requests for waiver of the 60-day period which were granted were limited to the specific amounts recommended for payment by the adjuster .  Therefore, the insured failed to submit evidence establishing a genuine issue of material fact concerning whether she filed a proof of loss for damages sought in the suit.