Insurance Law Hawaii

Anti-Concurrent Causation Clause Does Not Bar Excess Coverage

   The Fifth Circuit considered whether the district court properly determined that an excess policy covered flood, but that coverage was limited under the policy's anti-concurrent causation clause (post on district court's prior decision here).  The appellate court reversed in part and remanded.  Stewart Enter., Inc. v. RSUI Indem. Co., Inc., 2010 U.S. App. LEXIS 16555(5th Cir. Aug. 4, 2010).

   The insured's properties suffered heavy damage from wind and flood created by Hurricane Katrina.  The insured had three layers of insurance.  Lexington issued the primary lawyer, providing all risk coverage for up to $10 million, including $10 million in flood coverage.  Lloyd's had the first excess layer, $15 million of all risk coverage,  including $15 million in flood coverage, excess to the first $10 million provided by Lexington.  Finally, RSUI issued the second excess layer, providing a coverage limit of $225 million, excess to the $25 million provided by the first two layers.  Both Lloyd's and RSUI's policies were  "following form," adopting the terms and conditions of the Lexington primary policy.

   After Katrina, both Lexington and Lloyd's paid the full amounts of their policies.  RSUI resisted, however. RSUI contended it was not obligated to cover flood damage.  Even if flood damage was covered, it was limited by the anti-concurrent causation clause to damage caused exclusively by flood and not in conjunction with wind.  The insured argued the RSUI policy adopted the limits set forth in the Lexington and Lloyd's policies, and covered any of the $25 million in flood coverage unpaid by these policies.  Further, the anti-concurrent causation clause only operated above that $25 million limit.

   The district court found that the RSUI policy covered up to $25 million in flood damage, but that the anti-concurrent causation clause barred any recovery for damage jointly caused by wind and flood.  Damage caused by wind or flood exclusively, however, would be covered.

   Devoting extensive effort to untangle various provisions in the three policies, the Fifth Circuit first determined that RSUI's following form policy provided flood coverage.  The court then turned to whether the anti-concurrent causation clause under Lexington's policy barred recovery for damage caused concurrently by wind and flood within the $25 million limit.

   The relevant provision in Lexington's policy read:

This policy does not insure against loss or damage caused directly or indirectly by any of the following excluded perils.  Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss:  

. . .

P. loss or damage cause by or resulting from:

. . .

(2) Flood, unless specified in Section 3, Sublimits of Liability, Paragraph J., and then only for such specified amount

(3) any and all loss from any other cause when occurring concurrently or sequentially with . . . Flood . . . .

Section 3, Paragraph J set forth a $10,000,000 sublimit of liability to cover Flood.  Therefore, the Lexington policy excluded flood, but in the same sentence created an exception to the exclusion by providing flood coverage up to $10,000,000.

   The Fifth Circuit found there was coverage for damage caused by wind and flood regardless of the two anti-concurrent causation clauses.  RSUI's interpretation would force the insured to demonstrate that damage was caused exclusively by one of two included perils.  This reading could only assume a full exclusion of flood damage, ignoring that the Lexington policy, which the RSUI policy followed, did cover flood.  Accordingly, the anti-concurrent causation clause applied only to damage in excess of the $25 million aggregate limit.

   Thanks to new Damon Key colleague, Rebecca Copeland, for flagging this case.

Fifth Circuit Certifies Question to Louisiana Supreme Court on Assignment of Policies

   The Fifth Circuit asked the Louisiana Supreme Court whether a policy's anti-assignment clause prohibited post-loss assignments of policy rights.  See In Re: Katrina Canal Breaches Litigation, 2010 U.S. App. LEXIS 15603 (5th Cir. July 28, 2010).

   After Hurricanes Katrina and Rita, Louisiana distributed federal funds to homeowners under its "Road Home" program for repair of uninsured or under-insured property damage.  In return for such funds, recipients executed an assignment to the State all claims and future rights to reimbursement from any casualty, property or flood policy on their residence.  The program was popular and eventually created a one billion dollar shortfall.  To remedy the problem, the State sued various insurers, relying on the assignments to argue for recovery of funds expended under the Road Home program. 

   The district court denied the insurers' motion to dismiss, holding that the anti-assignment provisions did not bar post-loss assignments under Louisiana law.   The Fifth Circuit noted there were conflicting decisions from Louisiana courts.  An old case from 1936 invalidated an anti-assignment clause as applied to the post-loss assignment of rights to life insurance proceeds.  On the other hand, a Katrina case enforced an anti-assignment clause to invalidate a post-loss assignment of all claims arising out of the ownership of the insured property.  The Fifth Circuit noted that this more recent case was consistent with cases from several other jurisdiction and specifically cited the Hawaii Supreme Court's decision in Del Monte Fresh Produce (Haw.) Inc. v. Fireman's Fund Ins. Co., 183 P.3d 734, 747 (Haw. 2007).

   Given this inconsistency, the Fifth Circuit asked the Louisiana Supreme Court whether an anti-assignment clause barred an insured's post-loss assignment of claims under the policy when the assignment transferred contractual obligations, not just the right to money due?

Insurer's Motion to Void Policy for Misrepresentation Fails

   If the insured misrepresents that it owns the insured property, can the insurer void the policy?  In Grenoble House Hotel v. Hanover Ins. Co., 2010 U.S. Dist. LEXIS 75355 (E.D. La. July 26, 2010), the court denied the insurer's motion for summary judgment seeking to void the policy on misrepresentation grounds.

   Hanover issued to the insured a commercial policy covering damage to the hotel building, contents and business interruption.  After its property was damaged by Hurricane Katrina, the insured claimed for damage to the building and its contents, and for business interruption.  Hanover eventually tendered policy limits for contents and business interruption. 

   When policy limits were not paid for damage to the building, the insured sued.  Hanover moved for summary judgment, seeking to dismiss all of the claims because the insured represented itself to be the owner of the property when it fact it was the lessor, constituting a material misrepresentation.

   The policy stated it was void if any insured intentionally concealed or misrepresented a material fact concerning its interest in the covered property.  Under Louisiana law, a misrepresentation made in the negotiation of an insurance contract by the insured was not deemed material unless the misrepresentation was made with intent to deceive.

   Here, Hanover offered no evidence establishing that the insured represented that it was the owner of the property.  Although the "owner" box was checked on the policy application, there was no indication that a representative of the insured signed the application or provided information that it was the owner of the property.  Absent such evidence, Hanover failed to establish that the insured made a statement that was false. 

   Further, Hanover failed to provide any evidence establishing that a misstatement regarding ownership of the property would be material.  There was no evidence to establish that had Hanover known the insured was the lessor, as opposed to the owner of the building, it would have either declined to write the policy or would have issued the policy only upon the payment of a higher premium.  Accordingly, the motion for summary judgment was denied.

Anti-Concurrent Causation Clause Bars Coverage

   The Fifth Circuit considered the impact on coverage when an anti-concurrent causation clause seems to be contradicted by a "reverse" anti-concurrent causation clause in an endorsement.  See Penthouse Owners Assoc., Inc. v. Certain Underwriters at Lloyds, London, 2010 U.S. App. LEXIS 14531 (5th Cir. July 14, 2010).

   Penthouse's property was completely destroyed by Hurricane Katrina, leaving only a slab.  Penthouse recovered the policy limits from its flood insurer.  It then sought coverage from Lloyd's under its all-risk policy. 

   Lloyd's policy excluded water damage, including flood.  The policy's anti-concurrent causation clause provided that "such [water] loss or damage is excluded regardless of any other cause of loss or event that contributes concurrently or in any sequence to the loss."  The policy also had a Windstorm or Hail Deductible endorsement.  This endorsement stated,

   The [endorsement] . . .  applies to loss or damage to Covered Property caused directly or indirectly by windstorm or hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage.  If loss or damage from a covered weather condition other than windstorm or hal occurs, and that loss or damage would not have occurred but for the windstorm or hail, such loss or damage shall be considered to be caused by windstorm or hail and therefore part of the windstorm or hail occurrence. 

  Lloyd's denied Penthouse's claim based on the flood exclusion and the anti-concurrent causation clause.  Penthouse sued, alleging that the winds destroyed the condos several hours before the storm surge.  Therefore, the loss was caused entirely by wind, not by flood.   The district court denied Lloyd's motion for summary judgment, determining that the Windstorm Deductible endorsement provided coverage for hurricane damage regardless of whether the damage was caused by wind or flood.  In other words, the deductible did not serve to limit coverage, but expanded coverage to include any damage caused "concurrently or in any sequence to" windstorm, even if the damage otherwise would not have been covered under the flood exclusion.

   The Fifth Circuit reversed.  The plain language of the endorsement only described when the deductible applied.  The purpose of the broad language was to ensure that an insured could not escape the applicability of the higher deductible for windstorm damage simply because other weather events (with lower deductibles) contributed to the loss.

Federal Subject Matter Jurisdiction Lacking in Suit Based on Homeowner's Policy

   Can an insurer remove the insured's state court suit based on supplemental jurisdiction arising under a homeowner's policy when the insured has also sued a separate insurer in federal court under a flood policy?  The Fifth Circuit held where the federal court lacked original jurisdiction, removal was improper.  See Halmekangas v. State Farm Fire and Cas. Co., 603 F.3d 290 (5th Cir. 2010).

   The first floor of insured's home was flooded by Hurricane Katrina.  Five days later, a fire burned the house to the ground.  When he tried to recover under his homeowner's policy, he learned he was underinsured.  The insurer, ANPAC Louisiana Insurance Company, had only covered two of the three floors of the home.  ANPAC paid policy limits for the top two floors. 

   The insured sued ANPAC in state court, alleging the insurer was negligent for failing to insure the entire structure.  There was no federal question or diversity jurisdiction in the suit against ANPAC. 

   After filing the state action against ANPAC, the insured sued State Farm, his flood insurer, in federal district court, asserting federal question jurisdiction under the National Flood Insurance Program.  The suit alleged State Farm had underpaid for the flood damage.  When ANPAC learned of the federal suit, it removed the insured's state court action to federal court, asserting federal jurisdiction supplemental to the State Farm case under 28 U.S.C. 1367.  Over the insured's objection, the federal district court ruled it had jurisdiction because the object of the two suits was the same: damage to the insured's home.  The federal court then granted ANPAC's summary judgment motion.  The insured settled with State Farm.  The insured then appealed the adverse summary judgment decision and moved for dismissal of ANPAC's federal suit, arguing the district court never had subject-matter jurisdiction.

   The Fifth Circuit agreed.  Section 1367 allowed federal courts to hear state claims that combined with federal claims in the same lawsuit.  Section 1441 permitted parties to pull federal cases out of state court where the district court had original jurisdiction.  Under the right circumstances, 1367 and 1441 could combine to allow federal court jurisdiction of a state claim originally filed in state court.  But where, as here, the insured filed an action in state court with no federal question or complete diversity, the original jurisdiction necessary for removal under section 1441 was missing.  Supplemental jurisdiction on its own did not give federal courts the power to remove a state case in which it did not have original jurisdiction.  Accordingly, the district court's decision was vacated and remanded. 

   Thanks to my colleague, Mark Murakami (hawaiioceanlaw.com) for alerting me to this case. 

Court Ponders Complexities of Measuring Loss

   In Bradley v. Allstate Ins. Co., 2010 U.S. App. LEXIS 9510 (5th Cir. May 10, 2010), the policy's total loss provision was found ambiguous.  The case was remanded a factual determination on the amount to which the insureds were entitled for loss of their home.

   Hurricane Katrina totally destroyed the insureds' home, leaving only a slab.  Allstate determined the dwelling was unlivable.  Payments for structural damage under the insureds' flood policy were $63,800 and from their homeowners' policy $41,339.06, for a total of $105,139.06.  Allstate later performed a retroactive analysis that appraised the pre-storm market value of the home at $85,000.  The insureds indicated at a deposition they intended to rebuild their home, but they also purchased another home for $134,500.

   The Allstate policy promised to pay actual cash value if the insured did not repair or replace the damaged property.  But if the insured repaired the home within 180 days of the actual cash value payment, additional payments would be made to reimburse for the costs of repair.  The policy further stated that in the event of the total loss of the dwelling, the insured would pay the policy limits of $105,600.  Elsewhere, however, the policy said loss to property caused by flood would not be covered. 

   The insureds sued Allstate, claiming they were entitled to policy limits of $105,600. The district court determined that, despite the total loss provision in the homeowners policy, the insureds were only entitled to the actual cash value of their home, which, prior to Katrina, was less than the total amount they received under their homeowners and flood policies.  Any further recovery would amount to a double recovery.

   On appeal, Allstate argued that the total loss provision was inapplicable where the loss was caused, in part, by a non-covered peril such as flood.  The Fifth Circuit determined "total loss" was ambiguous because the provision was susceptible of two possible meanings:

(1) in the event of a total loss, Allstate would pay the agreed full value of the policy as long as a covered loss caused some damage to the property, even if a non-covered peril rendered the property a total loss; or

(2) Allstate was only required to pay the insureds the agreed face value of a policy when the property was rendered a total loss by a covered peril.

The ambiguity was construed in favor of the insureds, entitling them to a recovery of up to policy limits, or $105,600.

   Nevertheless, there was still the issue of a possible double recovery.  An unresolved question was whether the appropriate measure of the insureds' actual loss was the cost to rebuild or actual cash value.  Only if the fact finder determined the insureds intended to reconstruct their home would loss be measured by the cost to rebuild. The actual cost of rebuilding also presented a genuine issue of fact.  In the alternative, if the fact-finder concluded that the insureds were not rebuilding, then the starting point for the double recovery analysis would be the actual cash value of their property.  As long as the insureds' combined recovery under their homeowners and flood policies was less than their actual loss, then the double recovery rule would not preclude them from receiving additional compensation under their homeowners policy.  Finally, deductions had to be made for any excluded loss. Loss attributable to flood also raised a factual question inappropriate for summary judgment.

"Cost of Replacement" Does Not Cover Purchase of New Home When Insureds Plan to Rebuild Damaged Home

   Determining the "Cost of Replacement" of the insureds' home was before the court in Nunez v Allstate Ins Co., 2010 U.S. App. LEXIS 8362 (5th Cir. April 20, 2010). 

   The insureds' home in Louisiana was destroyed by Hurricane Katrina.  The insureds received flood policy limits of $75,000 for structural damage and $30,000 for contents.  Under the homeowner's policy, Allstate paid $19,856.08 for wind-related structural damage to the house. 

   After the hurricane, the insureds moved to Houston and used the money received from Allstate to purchase a new home for $172,000.  Meanwhile, the insureds gutted their Louisiana house, elevated it and patched the roof.  In a deposition, the insureds stated they intended to repair and someday return to the property.   Additionally, the insureds received money from a Louisiana state program after stating they intended to keep their Louisiana home.

   The insureds sued Allstate, alleging Allstate only made partial payments for the damage caused by wind and wind-driven rain.  Allstate moved for summary judgment, contending that because the insureds did not repair or replace their property, their recovery was limited to the actual cash value of the property.  With an actual cash value of $113,914, less the recovery under the flood policy, the insureds had already been paid for the damage to the home. 

   The insureds argued that the policy provided for replacing the damaged building through purchase of an existing structure.  They claimed that the purchase of the Houston home replaced the insured property, and that it was irrelevant that they intended to someday return to their Louisiana property.  Allstate responded that the insureds did not replace their Louisiana property because they gutted it, elevated it and patched the roof.  Further, purchase of the Houston home was not a replacement of their damaged home because they accepted funds from Louisiana based on their statement they intended to someday repair and return to their original home.

   The policy did not define the term "replace."  The common meaning of the word, however, was "to place again, restore to a former place position, or condition."   Under this plain meaning, the insureds' purchase of their Houston home did not constitute a substitute or replacement under the policy.  Accordingly, the insureds could not recover under the replacement provision.

Business-Interruption Costs Limited to Pre-Storm Revenues

   Measuring business interruption costs after Hurricane Katrina was the issue before the Fifth Circuit in Catlin Syndicate Ltd v. Imperial Palace of Mississippi, Inc., 2010 U.S. App. LEXIS 5389 (5th Cir. March 15, 2010).

   The insured operated a casino that was damaged by Hurricane Katrina, forcing it to shut down for several months.  When the casino reopened, its revenues were much greater than before the hurricane.  Many nearby casinos remained closed, offering few choices for people who wanted to gamble.  The insured submitted a claim to Catlin.  Catlin agreed to pay, but there was a dispute on the casino's losses.  The disagreement centered on the policy's business-interruption provision, which stated,

Experience of the business- In determining the amount of the Time Element loss as insured against by this policy, due consideration shall be given to experience of the business before the loss and the probable experience thereafter had no loss occurred.

   Catlin argued the casino's loss should be determined by looking solely at pre-hurricane sales.  The insured argued losses should be determined not as if Hurricane Katrina did not strike, but as if the Hurricane struck but did not damage the casino.  The district court agreed with Catlin.  Profits upon reopening after Hurricane Katrina were not taken into account to determine what the casino would have experienced had the storm not occurred.

   On appeal, the Fifth Circuit was guided by its decision in Finger Furniture Co. v. Commonwealth Ins. Co., 404 F.3d 312 (5th Cir. 2005).  There, the court held that the proper method for determining loss under the business-interruption provision was to look at sales before the interruption rather than sales after the interruption.  Because the policy provision in Finger Furniture Co. was similar to that in Catlin's policy, the court determined only historical sales should be considered when determining loss.

Claim Against Mortgage Company for Elmininating Wind Insurance Survives Motion to Dismiss

   Plaintiff's home was damaged by Hurricane Katrina on August 29, 2005.  See Bridges v. EMC Mortgage Corp., 2010 U.S. Dist. LEXIS 18433 (S.D. Miss. March 2, 2010).  She filed suit against her insurer, Liberty Mutual.  In her amended complaint, the plaintiff added her mortgage company, EMC, as a defendant, alleging EMC failed to procure wind coverage. 

   The amended complaint alleged that under the mortgage, plaintiff assigned the obligation of payment for insurance and to obtain insurance to the mortgagee.  On August 18, 2004, EMC's agent notified it that the home had not been covered by wind insurance since July, when Liberty Mutual did not renew wind coverage.  Further, the agent informed EMC that premiums for wind coverage should be forwarded from the escrow account to the Mississippi Windstorm Underwriters Association (MWUA), but EMC failed to do so.  The plaintiff alleged she was not informed of this prior to Hurricane Katrina.  Therefore, she alleged EMC misrepresented the fact that it would purchase the wind insurance.

   The plaintiff settled with Liberty Mutual.  EMC filed a motion to dismiss.  The court noted that one who undertakes to procure insurance coverage owes a duty of reasonable care and good faith in performing the duty.  Here, EMC was notified over a year prior to Katrina that the premiums were to be forwarded to the MWUA, but EMC never did so.  Accepting these allegations as true, the Amended Complaint stated a claim for failure to procure insurance under both contract and negligence theories.  Accordingly, the motion to dismiss was denied.

Summary Judgment Improperly Granted for Insured's Hurricane-Related Property Loss and Business Interruption Claims

   The insured, Versai, managed apartments that were so extensively damaged by Hurricane Katrina that they were uninhabitable.  See Versai Mg. Corp. v. Clarendon Am Ins. Co., No. 08-30874, 2010 U.S. App. LEXIS 3479 (5th Cir. Feb. 19, 2010).  Versai notified its insurers and submitted claims with the assistance of its private adjusters and contractors.  Estimated repairs amounted to over $17 million, but was later increased by $10 million to comply with building codes.  Lloyd's paid limits of $2.5 million on its all-risk policy.  Standard Fire Insurance Company paid $6 million under a flood insurance policy.  Excess coverage was provided by Clarendon and EFIC up to $13.4 million.  Each eventually paid $2.9 million.

   Versai sued the excess carriers, seeking additional for coverage for property damage, business interruption loss, replacement costs, and code compliance upgrades.  The district court granted summary judgment to the carriers on all claims.

   The Fifth Circuit affirmed in part, reversed in part.  The district court denied further coverage for property loss based on Versai's failure to support its proofs of loss with sufficient documentation.  The Fifth Circuit reversed on this point because the policy did not require additional documentation to support a proof of loss.  The Fifth Circuit also determined summary judgment had been improperly granted to the excess carriers on the business interruption loss because there were issues of fact regarding the length of apartment vacancies after the hurricane.

   The Fifth Circuit affirmed, however, the district court's granting summary judgment on the claim for payment for the costs of bringing the apartments into compliance with current building codes.  The policy did not provide for such costs until after the insured had incurred the expense of compliance with the building code.  Finally, Versai's claim for replacement costs was properly dismissed because the policy required completion of repairs before the insured could be reimbursed.