Insurance Law Hawaii

No Coverage For Negligent Misrepresentation Without Allegations of "Bodily Injury" or "Property Damage"

   Jeff City Industries was the general contractor for a sewer system improvement project in Branson, Missouri. Bituminous Cas. Corp. v. United HRB Gen. Contractors, Inc., 2011 U.S. Dist. LEXIS 145666 (W.D. Mo. Dec. 19, 2011). Branson sued Jeff City, alleging breach of the construction contract for the project. The claims included improperly bedded sewer piping, improper aligning portions of trenching for the sewer piping, improper service line connections to the sewer piping, etc. Further, Ozark Mountain Consultants, a subcontractor of Jeff City and a third-party defendant in the underlying action, brought a cross claim against Jeff City for negligent misrepresentation as to whether Jeff City procured insurance.

   Bituminous sought a declaratory judgment that it had no duty to defend because Branson's claims against Jeff City did not constitute "occurrences." Moreover, Ozark Mountain's claims did not allege "bodily injury" or "property damage."

   The court first determined that Branson's petition in the underlying case only alleged contractual claims. Accordingly, there was no "accident" or "occurrence" triggering Bituminous' policy.

   Turning to Ozark Mountain's cross claim, the court agreed that negligent misrepresentation could be an "occurrence" under a CGL policy. Here, however, the cross claim did not allege physical damages such as flooding or loss of use, but only asserted costs incurred in defending and prosecuting legal actions. Because Ozark Mountain's petition did not allege "bodily injury" or "property damage," Bituminous had no duty to defend.

  

Illinois Court Determines Insurer Must Defend Negligent Misrepresentation Claim

   Although the insureds disclosed flooding problems in the basement, the buyers purchased their home. USAA Cas. Ins. Co. v. McInerney, 2011 Ill. App. LEXIS 1130 (Ill Ct. App. Oct. 31, 2011). In a supplemental disclosure, the insureds reported that during heavy rains light seepage occurred in the basement.

   After moving in, the buyers experienced significant water infiltration and flooding in the basement. The buyers and their children also began to experience mold-related illnesses.

   The buyers sued for rescission of the contract or, in the alternative, damages. They alleged breach of contract, fraudulent misrepresentation and negligent misrepresentation. In the claim for negligent misrepresentation, the buyers alleged that the insureds carelessly omitted the fact that there were material defects in the basement and foundation when they should have known of such defects.

   The insureds tendered the suit to USAA. The policy covered claims for damages because of bodily injury or property damage caused by an occurrence. USAA contended any alleged occurrence was excluded because it was caused by the intentional acts of the insureds or because the action arose from a contract. The trial court determined USAA had a duty to defend. Both the flooding in the house subsequent to the sale and the negligent misrepresentations constituted property damage and personal injury.

   The appellate court affirmed. A claim based on negligent misrepresentation was not necessarily excluded from coverage under a homeowner's general liability policy as long as the insured did not expect or intend the injury. Moreover, the buyer's complaint alleged "property damage" and "bodily injury" as a result of an "occurrence" that was at least potentially covered by the policy. Therefore, USSA had a duty to defend.

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.

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.

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.

    

  

 

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.

Lack of Occurrence or Property Damage Negates Liability Coverage

   In Kaufmann v. The Travelers Companies, Inc., 2010 U.S. Dist. LEXIS 20027 (D. Md. March 5, 2010), the insureds sold their restaurant to plaintiffs.  The insureds represented that the restaurant and bar seated 400 patrons.  The plaintiffs made known to the insureds they intended to create a patio that would utilize the 400 seat capacity.

   After the sale, the plaintiffs built a patio, but then the septic system at the restaurant could accommodate only 226 patrons.  The plaintiffs sued, contending the insureds violated the sales agreement by breaching warranties and failing to indemnify the plaintiffs for such breach.  The insureds had warranted that they were in compliance with all relevant laws and regulations.  The restaurant, however, had 277 chairs and 20-30 bar stools in violation of the 226 seating capacity at the time of sale.

   Travelers refused to defend and indemnify after the underlying suit settled.  When the insureds sued, Travelers moved for summary judgment.  The district court first determined there was no occurrence.  Because it was foreseeable that the plaintiffs would want to accommodate 400 patrons in the restaurant, no accident occurred.  Second, there was no loss of use or tangible property damage that fit into the definition of "property damage" under the CGL policy.  Although the plaintiffs were unable to seat 400 patrons immediately after they built the patio to increase seating capacity, the rest of the restaurant was still functioning, and the septic system was in working condition at all times.

Fifth Circuit Again Finds in Favor of Policy-Holder

    Continuing its recent trend in post-Katrina cases to find for the policy-holder (see Dickerson v. Lexington Ins. Co., 2008 WL 5295389 (5th Cir. Dec. 22, 2008)[ reviewed here]; Grilletta v. Lexington Ins. Co. 2009 U.S. App. LEXIS 276 (5th Cir. Jan. 8, 2009)[reviewed here]), the Fifth Circuit reversed an award of summary judgment in favor of the insured in Campo v. Allstate Ins. Co., No. 07-31165, 2009 U.S. App. LEXIS 5460 (5th Cir. March 17, 2009).  

    Prior to August 2005, and for over twenty years, the insured held a Standard Flood Insurance Policy ("SFIP") through Allstate, which issued the policy as a Write-Your-Own ("WYO") carrier.  The insured's policy expired on August 12, 2005, when a premium of $1,237 was due to reinstate coverage for 2005-2006.   Hurricane Katrina struck on August 29, 2005, destroying the insured's home.  The policy included a 30-day grace period, so that if the insured paid the premium by September 13, he would have avoided a gap in coverage.  After Hurricane Katrina, FEMA extended the 30-day grace period for an additional ninety days. 

    Shortly after the hurricane, the insured filed a claim under the expired policy.  Allstate processed the claim and sent an advance check of $2,500 to the insured.  Allstate never informed the insured that these payments were conditional on receipt of the $1,237 premium.

    On December 12, 2005, the extended grace period expired without the insured having submitted his premium.  In late December, Allstate informed the insured that it must repay the $2,500 it had advanced. 

    The insured sued, alleging Allstate made negligent misrepresentations that prevented the insured from renewing his policy.  The District Court noted FEMA regulations governed the methods by which WYO carriers adjust and pay claims.  The Court granted Allstate's motion for summary judgment, holding that the insured's claims were handling-related and thus preempted by federal law.

    The Fifth Circuit reversed.  Although federal law preempted state law tort claims arising from claims handling by a WYO, claims related to procurement of insurance were not preempted.  Here, the insured's policy had expired subject to restoration if he paid the premium within the extended grace period.  Allstate was thus incapable of handling any new claims based on post-expiration occurrences.  As a former policy-holder, the insured would have had to procure flood insurance. 

    Next, the Fifth Circuit determined federal law did not preempt state-law procurement-based claims.  First, Congress, through its delegation of regulatory power to FEMA over flood claims, had expressly preempted state law only as to handling-related claims.  Second, unlike handling-based cases, prosecution of procurement-related state-law tort suits did not impede the full purposes and objectives of Congress.  Therefore, state-law tort claims related to procurement did not interfere with Congress's objectives.

Eighth Circuit Determines Alleged Misrepresentation Not Material

     The Eighth Circuit recently considered whether State Farm was authorized to deny coverage for fire loss based on the insured's alleged misrepresentation.  See Warren v. State Farm Fire & Casualty Co., No. 07-2010 (8th Cir. July 10, 2008).

     The insured's home was destroyed by a fire in the early morning hours while she slept elsewhere. The insured gave two statements to State Farm which were the source of the alleged misrepresentations.  In her first statement, she denied having any prior insurance loss claims.  She also denied having any judgments entered against her.  In the second statement, however, she admitted she had a 2002 insurance loss claim arising from a car fire.  Further, the insured claimed she was unaware of a 2001 default judgment entered against her son and herself as a co-signer on a car note.

     State Farm denied the claim based on material misrepresentations.  The insured sued.  After the insured prevailed in the district court and was awarded damages, State Farm appealed.  The Eighth Circuit looked to the terms of the policy, which stated a material misrepresentation existed where the insured "intentionally concealed or misrepresented any material fact or circumstances relating to the insurance whether before or after a loss."  Therefore, State Farm had to show a misrepresentation was both intentional and material. 

     The incorrect statement that insured had no outstanding judgments was not a material misrepresentation because State Farm presented no evidence that the insured possessed the requisite intention to mislead.  Further, whatever relevance the prior car fire claim had, State Farm presented no evidence that its investigation would have been different had it known of the prior fire loss in the insured's first statement.  Therefore, the initial misrepresentation was not material.

     Hawai`i approach to an insured's alleged misrepresentation was expressed in Park v. Government Employees Ins. Co., 89 Haw. 394, 399974 P.2d 34, 39 (1999).  There, the Hawai`i Supreme Court adopted the general rule regarding materiality stated in 7 Couch on Insurance 2d sec. 35:45 (1985).  This rule states that, "generally, a misrepresentation is material either when the insurer would not, as a careful and intelligent man, have issued the policy had the truth been known, or would have issued it only at a higher rate of premium." 

Insurance Fraud

While not exactly an insurance coverage case per se, the Intermediate Court of Appeals just came out with a new decision on jury instructions in a criminal insurance fraud case.  See State v. Watanabe, No. 26777 (December 31, 2007).  In short, an individual damaged his own car and attempted to file a vandalism claim against AIG.  AIG representatives became suspicious when they noted the systematic nature of the damage and the fact that some of the damaged areas appeared to be rusted (indicating the damaged had occurred previously). 

This case is a good reminder that insurance fraud is theft and will be treated accordingly.