Insurance Law Hawaii

Eighth Circuit Affirms Judgment for Bad Faith after Insured's Home Destroyed by Fire

    The Eighth Circuit affirmed the district court's judgment that the insurer acted in bad faith when it denied the insured's claim based upon misrepresentations in the application after destruction of his house by fire. Hayes v. Metropolitan Pro. and Cas. Ins. Co., 2018 U.S. App. LEXIS 31813 (8th Cir. Nov. 9, 2018).

    Hayes' home was insured by Met under a homeowner's policy. Hayes used the detached garage as part of a home base for his plumbing business. He also rented out the second and third levels of the residence to a tenant and her two children. When Hayes applied for the policy in 2007, Met argues he indicated on the application that the premises were not used to conduct business, and were not used as rental property. 

    The application, however, was a confusing document. Hayes testified that he did not recall personally completing the application in 2007, that he worked with an independent insurance agent when it was filled out, and it was signed with his signature stamp used by his sister. With regard to the tenants, the form asked whether "the residence was held exclusively for rental?" The pre-printed "x" was marked out next to the letter "N" in answer to the question. Regarding the business, the form asked whether "any farming or other business was conducted on the premises?" Again, a box indicating "no" was marked with a preprinted x. Hayes testified that while he did maintain some plumbing supplies at the property, very little of the plumbing equipment was located in the detached garage due to limited space. Further, he had a separate commercial business policy to cover the plumbing business in the detached garage. 

    On January 24, 2013, the home was destroyed by a fire. Hayes filed a claim with Met. Met made a notation as of January 28, 2013 that it believed the fire was intentionally set. By January 29, 2013, Met knew that Hayes was operating part of his business at the detached garage near the premises, and that he leased the upper portion of the premises to tenants. 

    Yet, Met did not deny the claim until August 5, 2014. It cancelled the policy ab initio based upon material misrepresentations, and enclosed a check for all premiums Hayes had paid, with interest. Hayes returned the premium check. Met also sent a check to Hayes' bank for $127,342.97 to satisfy the balance due on Hayes's mortgage.  

    Hayes sued Met in October 2014 for breach of contract and bad faith denial/investigation. The district court dismissed the breach of contract claim as time-barred. The court, however, entered judgment in favor of Hayes on the bad faith claim. The court found that the insurance application was completed by the independent insurance agent and signature stamped by Hayes's sister. Further, the application contained ambiguous questions. Accordingly, there was a lack of evidence that Hayes knowingly provided false answers on the application with the intent to deceive. Damages in the amount of $439,455, and attorneys' fees of $86,160 were awarded to Hayes. 

    The Eighth Circuit affirmed. Met could not insulate itself from a bad faith claim by creating the fiction that a contrct never existed by voiding or rescinding it "ab initio." Hayes met his burden of proving the elements of bad faith under Nebraska law - Met had no reasonable basis for denying the claim and did so with knowledge or with reckless disregard of that fact. 

    The damage award was affirmed. The district court properly calculated the economic damages Hayes suffered as a result of Met's bad faith refusal to pay pursuant to the provisions of the improperly rescinded contract. Finally, the attorneys' fees award was also affirmed. 

Certified Question Asks Washington Supreme Court Whether Insurer is Bound by Contradictory Certificate of Insurance

    The Ninth Circuit certified a question to the Washington  Supreme Court as follows:

Under Washington law, is an insurer bound by representations made by its authorized agent in a certificate of insurance with respect to a party's status as an additional insured under a policy issued by the insurer, when the certificate includes language disclaiming its authority and ability to expand coverage?

T-Mobile USA Inc. v. Selective Ins. Co lf Am., 2018 U.S. App. LEXIS 31863 (9th Cir. Nov. 9, 2018). 

    In 2010, T-Mobile entered into a Field Services Agreement (FSA) with Innovative Engineering, Inc. under which Innovative would provide services in connection with the construction of rooftop cellular antennae towers in New York City. The FSA required Innovative to maintain general liability insurance naming T-Mobile as an additional insured, and required that Innovative provide T-Mobile with certificates of insurance documenting the coverage. Innovative obtained coverage from Selective Insurance Company of America. 

    The policy contained an Additional Insured (AI) Endorsement that extended "additional insured" status to any entity with whom Innovative entered into a written contract requiring Innovative to add that entity as an additional insured. In 2012, Selective's authorized agent and insurance broker, the Van Dyke Group, Inc. (VDG) issued a Certificate of Insurance (COI) to T-Mobile. The COI stated that T-Mobile, as the certificate holder, "is included as an additional insured" under the Policy. But it also stated that the COI "is issued as a matter of information only and confers no rights upon the certificate holder," "does not affirmatively or negatively amend, extend or alter the coverage afforded by" the Policy, and "does not constitute a contract between the issuing insurer 's authorized representative or producer and the certificate holder." The COI further warned that "if the certificate holder is an Additional Insured, the policy must be endorsed." This was apparently never done.

    In 2009, the owner of the building on which the cell towers were placed informed T-Mobile and Innovative of alleged property damage that resulted from Innovative's earlier work on the rooftop. Innovative and T-Mobile tendered claims to Selective. In April 2013, the building owner sued T-Mobile and Innovative. 

    Selective agreed to defend Innovative, but denied the tender from T-Mobile because T-Mobile did not appear in the Selective policy named as an insured and did not qualify as an additional insured.

    T-Mobile filed suit and sought partial summary judgment, arguing that the 2012 COI issued by Selective's authorized agent stated that T-Mobile was an additional insured. The district court denied T-Mobile's motion and granted Selective's cross-motion for summary judgment.

    On appeal, the Ninth Circuit noted there were two competing principles under Washington insurance law presented by the case. First, under Washington law, an insurer was bound by all acts of its agent which were within the scope of the agent's real or apparent authority. Second, under Washington law, the purpose of issuing a COI was to inform the recipient that insurance had been obtained. 

    Washington law was therefore conflicted on whether Selective was bound by VDG's representation in the 2012 COI that T-Mobile was an additional insured under the Policy. The Ninth Circuit concluded hat the proper course of action was to certify the issue to the Washington Supreme Court. 

    

Forest Fire Constitutes One Occurrence

    The Wisconsin Supreme Court determined that a fire damaging several properties arose from one occurrence. Secura Ins. v. Lyme St. Croix Forest Company, LLC., 2018 Wis. LEXIS 579 Oct. 30, 2018). 

    A fire broke out on forest land owned by Lyme St. Croix Forest Company. Known as the "Germann Road Fire," it burned 7, 442 acres over three days. Real and personal property belonging to many individuals and businesses were damaged. The fire allegedly began while equipment owned by Ray Duerr Logging, LLC was being repaired. Flames quickly spread from dry grass to a pile of recently felled trees and spread to the surrounding forest. 

    Secura insured Duerr under a CGL policy. The policy had a $2 million general aggregate policy limit and a $1 million per-occurrence limit. The policy also had a "Logging and Lumbering Operations Endorsement" with a $500,000 per-occurrence limit for property damage due to fire. 

    Secura filed suit for a declaratory judgment to determine its coverage obligations. Secura argued in its motion for partial summary judgment that the Germann Road Fire was a single occurrence. Therefore, the $500,000 policy limit from the endorsement applied rather than the $2 million aggregate limit. The circuit court rejected Secura's argument, finding that "each 'seepage' of fire onto another's property constituted a separate occurrence for purposes of the policy." The court of appeals affirmed, finding there was an occurrence each time the fire spead to a new piece of property and caused damage.

    On appeal, the Supreme Court noted that Wisconsin followed the "cause theory" in determining whether there was a single occurrence or multiple occurrences. Under the cause theory, where a single, uninterrupted cause resulted in all of the injuries and damage, there was one occurrence. Some jurisdictions followed the effect theory where each accident must be construed from the point of the view of the person whose property was damaged. Pursuant to the effect theory, there would be an occurrence when the separate property of each claimant was damaged. 

    The Supreme Court disagreed with the analysis of the court of appeals. If there was an occurrence each time a fire refueled and expanded, then a fire, which is constantly refueling and expanding, would result in an unfathomably large number of occurrences regardless of how many property lines it crossed. Therefore, the court concluded the Germann Road Fire constituted a single occurrence and the $500,000 per-occurrence limit applied to the property damage. 

We Hit Eleven Years of Blogging

  Insurance Law Hawaii hit eleven years of blogging last week. We started in December 2007, 1251 posts ago. Blogging has served as a invaluable self-education on multiple coverage issues in an effort to keep abreast of the constantly changing landscape. We hope readers have found the posts to be useful and informative.

      As we head into our twelfth year, thanks hanks also to you, the readers, for your support and interest again this year. On to another year of blogging in 2019.

Claims Against Agent Rejected

    The court granted the agent's motion for summary judgment, rejecting the insureds' claim that he negligently failed to obtain snow-ice coverage for two new chicken houses. Slaubaugh Farm, Inc v. Farm Family Cas. Ins. Co., 2018 Del. Super. LEXIS 1144 (Del. Super. Ct. Oct. 29, 2018). 

    The plaintiffs purchased a farm in 1998 and secured a property policy through Joseph McGowan, an insurance agent for Farm Family. Farm Family issued a Notice of Cancellation of the policy because plaintiffs failed to comply with its request for an inspection of two chicken houses on the farm. After a severe winter in which many chicken houses were damaged, Farm Family non-renewed all of its chicken business in the region. Coverage in the future would be provided only under a Peril Group 4 policy and an inspection of the buildings before issuance of the policy. 

    In 2015, the plaintiffs informed McGowan that they intended to build two new chicken houses and again requested coverage from Farm Family. Plaintiffs also requested confirmation of the insurance coverage be sent to the mortgage company. Plaintiffs did not request any specific coverage. McGowan prepared an application and submitted it to Farm Family. McGowan also submitted a binder request to Farm Family for coverage of the two chicken houses. Farm Family approved the binder request under Peril Group 4 subject to an inspection. A copy of the binder was emailed to the mortgage company.

    McGowan's office was responsible for scheduling new chicken houses for inspection. An inspection was requested, but Family Farm never inspected the two new chicken houses. Six months later, a blizzard caused one of plaintiffs' new chicken houses to collapse. Coverage was denied and plaintiffs sued Family Farm and McGowan. McGowan moved for summary judgment.

    The court first determined there was a genuine issued of material fact as to whether McGowan had a duty to obtain snow-ice coverage for plaintiffs. The court further denied the motion regarding McGowan's duty to ensure that the inspection of the new chicken houses took place. If McGowan had inquired about the status of the inspection, and communicated that to the plaintiffs, then the plaintiffs could have decided to continue seeking coverage from Family Farm or pursued coverage from another insurer. 

    McGowan's final argument was that plaintiffs had to show that his alleged negligence was a proximate cause of their injury. This meant plaintiffs had to show there was snow-ice coverage that was commercially available for their loss. The court agreed it was too speculative to conclude that Farm Family, or any other insurance company, would have provided snow-ice coverage to plaintiffs had an inspection been conducted. The plaintiffs could have presented testimony and information on the availability of such coverage, but failed to do so. 

    Therefore, McGowan's motion for summary judgment was granted. 

Anti-Concurrent Causation Clause Preserves Possibility of Coverage

    The policy's anti-concurrent causation clause preserved the possibility of coverage when the insurer's motion for summary judgment to disclaim its indemnity obligation for damage caused by Hurricane Sandy was overturned by the Second Circuit. Madelaine Chocolate Novelties, Inc. v. Great Northern Ins. Co., 2018 U.S. App. LEXIS 29821 (Oct. 23, 2018 2nd Cir. )

    In 2012, Madelaine Chocolate suffered significant damage to its business due to storm surges created by Hurricane Sandy. Madelaine Chocolate had an "all-risk" policy issued by Great Northern. Madelaine Chocolate filed a claim for property damage of approximately $40 million and business income loss and extra operation expenses of $13.5 million. Great Northern denied most of the claim, reasoning that the storm surge damage was excluded under the policy.

    The policy included a Windstorm Endorsement which defined "windstrom" as  "wind" or "wind-driven rain . . . which contributes concurrently to or contributes in any sequence to the loss or damage, even if such other cause or event would otherwise be covered." Therefore, the Windstorm Endorsement contained its own anti-concurrent causation (ACC) clause. Madelaine Chocolate interpreted the Windstorm Endorsement, particularly its ACC clause, to encompass losses caused by storm surge, a wind-driven peril.

    Great Northern, however, denied coverage based upon the policy's flood exclusion provision, which stated the insurance did not apply to loss or damage caused by "waves, tidal water or tidal waves" which "contributes concurrently to or contributes in any sequence to the loss or damage, even if such other cause or event would otherwise be covered." Therefore, the parties disputed whether storm surge damage was excluded from coverage under the Flood Exclusion in light of the Windstorm Endorsement's ACC clause. The district court granted summary judgment to Great Northern, finding that the Flood Exclusion unambiguously excluded storm surge damage from coverage under the policy. 

    The Second Circuit vacated the district court's judgment and remanded for further proceedings. The district court was instructed to assess whether the Windstorm Endorsement's ACC clause conflicted with or otherwise created an ambiguity due to the policy's Flood Exclusion. It was suggested that the district court may wish to permit discovery into interpretive materials relating to the Windstorm Endorsement and its relationship to the policy's coverage provisions. 

Connecticutt Class Action on Collapse Claims Faces Motion to Dismiss

    The federal district court dismissed some insurers from a class action suit alleging failure to provide coverage for collapse claims. Halloran v. Harleysville Preferred Ins. Co., 2018 U.S. Dist. LEXIS 179807 (D. Conn. Oct. 19, 2018).

    A class of homeowners brought suit in 2016 against their homeowners insurance companies ("defendants") for failure to cover collapse claims. Plaintiffs alleged they bought their homes between 1984 and 2015. Each of the homes had basement walls that were "crumbling and cracking due to the oxidation of certain minerals contained in the concrete." As a result of the deteriorating concrete, plaintiffs claimed that their basement walls were in a state of collapse. 

    Plaintiffs alleged that the Insurance Services Office, Inc. ("ISO") and the insurance companies were aware of the concrete issues in Connecticut at least as early as 1996, when claims began to be filed. Defendants and the ISO deliberately changed their policies' definitions of "collapse" to try to avoid or minimize liability for potential claims brought by plaintiffs. The new language excluded losses to a foundation or retaining wall and "settling, cracking, shrinkage, bulging or expansion" from coverage of collapse. 

    The standard policy language produced by the ISO and adopted by the insurers went through several iterations between 1990 and the present. Originally, the coverage provided for the "direct physical loss to covered property involving collapse of a building  . . ."  The term "collapse" was undefined.

    In 1999, ISO language allegedly changed and defined collapse as "an abrupt falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its current intended purpose." Further, a building "in danger of falling down or caving in" or that "is standing" is "not considered to be in a state of collapse." Plaintiffs alleged that each defendant changed the language of their policies over time and that these changes attempted to delete coverage.

    The defendants moved to dismiss the fourth amended complaint. The court looked at specific policy language to determine whether the term "collapse" was ambiguous. The first set of claims submitted by plaintiffs arose under language adopted by the ISO in 1997. The policies provided for coverage of "direct physical loss to covered property involving collapse of a building or any party of a building" when the result of several different causes, such as "hidden decay," "use of defective materials," etc. Prior Connecticut cases had found the term "collapse" in these policies to be ambiguous. Plaintiffs with claims arising under the older policy language therefore properly alleged a "collapsed" that could be covered under the policies. 

    Plaintiffs who alleged that their policy included collapse provisions without temporal modifiers such as "abrupt" also survived a motion to dismiss because the policy language was sufficiently ambiguous.

    A second category of policies also included temporal modifiers, requiring the collapse to be "abrupt' and the building to be unusable for its normally intended purposes. Still other policies required the collapse to be "sudden and accidental." Under these policies, the "collapse" provision was not ambiguous, requiring a "sudden" collapse. The defendants' motion to dismiss was granted as to these policies. 

    The third category of policies, over time, adopted more restrictive language. The motion to dismiss as to these policies was denied. There remained issues of fact and law as to whether the insurers were obligated to notify the insureds of changes in the policy definition of collapse and whether the insurers did so. 

    Defendants also moved to dismiss plaintiffs' claims for breach of he implied covenant of good faith and fair dealing. Because several plaintiffs had not pled a plausible claim for breach of contract, their claims for breach of the implied covenant of good faith and fair dealing also failed. For plaintiffs who survived dismissal of their breach of contract claims, however, the motion to dismiss the breach of the implied covenant of good faith and fair dealing was denied. Plaintiffs alleged that defendants knew that plaintiffs' claims were covered. Further, defendants misled plaintiffs in order to receive their premiums without providing the requisite coverage. 

    Finally, the arguments of certain defendants to strike the class allegations was denied. The issues would be better addressed when the motion for class certification was considered, after more development of the record in the case. 

    

    

Full Coverage Extended for Loss of BitCoin

    The Court of Common Pleas in Ohio determined that BitCoin was property and denied the insurer's motion for judgment on the pleadings seeking to establish there was limited coverage for the loss. Kimmelman v. Wayne Ins. Group, 2018 Ohio Misc. LEXIS 1953 (Ohio Misc. Sept. 25, 2018). 

    James Kimmelman submitted a claim to Wayne Insurance Group based upon a loss of $16,000 of BitCoin that had been stolen. The insurer investigated the claim and awarded $200 to Kimmelman. The insurer determined that the property was "money" and governed by a sublimit within the policy. Kimmelman filed suit and Wayne Insurance moved for judgment on the pleadings, arguing that BitCoin was "money" under the policy, and that Kimmelman had no claim for breach of contract or bad faith. 

    The insurer relied upon references in articles from CNN, CNET, and the New York Times to support the argument that BitCoin was recognized as "money." The only authority, however, that the court could rely on in determining the status of BitCoin was the Internal Revenue Service Notice 2014-21. There, the IRS stated, "For federal tax purposes, virtual currency is treated as property." Therefore, BitCoin was recognized as property by the IRS and would be so recognized by the court.

    Accordingly, Kimmelman properly pled his complaint for breach of contract and bad faith. The motion for judgment on the pleadings was denied. 

Ohio Supreme Court Holds No Occurence Arises from Subcontractor's Faulty Workmanship

    The Ohio Supreme Court bucked the modern trend by finding that there was no coverage under CGL policy's the subcontractor's exception for faulty workmanship claimed against the insured. Ohio N. Univ. v. Charles Constr. Servs. 2018 Ohio LEXIS 2375 (Ohio Oct. 9, 2018).

    The University contracted with Charles Construction Services, Inc. to build a new luxury hotel and conference center on campus. After work was completed, the University discovered extensive water damage from hidden leaks that it believed were caused by the defective work of Charles Construction and its subcontractors. Repairs were made at the cost of $6 million. 

    The University sued Charles Construction for breach of contract and other claims related to the damage. Charles Construction answered and filed third-party complaints against its subcontractors. Charles Construction tendered to its insurer, Cincinnati Insurance Company (CIC), seeking a defense. CIC agreed to defend under a reservation of rights. CIC intervened in the lawsuit and sought a declaratory judgment that it did not have a duty to defend or indemnify. CIC then filed a motion for summary judgment.

    CIC relied upon a prior decision from the Ohio Supreme Court, Westfield Ins. Co. v Custom Agri. Sys., Inc., 979 N.E. 2d 269 (Ohio 2012), which held that property damage caused by a contractor's own faulty work was not accidental and therefore not covered. The issue currently before the court was whether the general contractor's policy covered claims for property damage caused by a subcontractor's faulty work. 

    The trial court found in favor of CIC. The court of appeals reversed, noting that Custom Argi. had not addressed issues raised by the policy's products-completed operations hazard coverage or subcontractor specific policy terms. 

    Those provisions can be summarized as follows. The policy excluded property damage to:

(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

Paragraph (6) of this exclusion does not apply to "property damage" included in the "products-completed operations hazard."

The policy defined "products-completed operations hazard" as including,

"property damage" occurring away from premises you own or rent and arising out of . . . "your work" except:

. . .

(2) Work that has not yet been completed or abandoned.

    Despite these provisions, a subcontractor's faulty work did not meet the definition of an "occurrence" because it was not based upon fortuity. The insuring agreement agreed to pay for property damage under certain circumstances. But the damage must be due to an "occurrence." There was no question that the water-related damage was "property damage" and was discovered after the work had been completed. But unless there was an "occurrence," the products-operations completed hazard provision and subcontractor exception had no effect, despite the fact that Charles Construction had paid additional money for it. 

    The court was aware that is reasoning was at odds with recent decisions of other courts. But the language requiring that "property damage" be caused by an "occurrence" remained a constant in the policies. Under the court's precedence, faulty workmanship was not an occurrence as defined in CGL policies. 

    The court therefore reverted to reasoning used before changes to the standard CGL policy in 1986, finding that inadvertent faulty workmanship could never be fortuitous or an accident. The CGL policy was altered in 1986 to provide coverage for certain kinds of property damage caused by inadvertent faulty work. The exclusions were modified to narrow the scope of coverage that was provided when property damage was caused by faulty workmanship. The subcontractor exception was intended to provide coverage for a general contractor when property damage was caused by the faulty work of a subcontractor. This was particularly the case when the property damage occurred after the general contractor had completed the project and the damage was to something other where the allegedly defective work was done. This history was neither addressed nor reconciled by the Ohio Supreme Court's decision. 

 

Data Breach Does Not Constitute "Personal Injury" Under CGL Policy

    The federal district court agreed with the insurer that there was no coverage for the insured's causing a data breach. St. Paul Fire & Marine Ins. Co. v. Rosen Millennium, Inc., 2018 U.S. Dist. LEXIS 173072 (M. D. Fla. Sept. 28, 2018).

    Millennium provided data security services for Rosen Hotels & Resorts, Inc. (RHR). In February 2016, RHR became aware of a potential credit card breach at on of their hotels. RHR hired a forensic investigator to determine whether a data breach occurred. The forensic investigator found malware installed on the payment network and determined that customers' cards may have been affected. RHR disclosed the data breach to potentially affected customers.

    Millennium submitted a Notice of Claim to St. Paul after receiving an email from RHR indicating that RHR believed that the data breach was caused by Millennium's negligence and inquiring as to whether Millennium had insurance to cover such a loss. St. Paul issued a reservation of rights, indicating there was no coverage for the claim. Millennium then provided a letter from RHR in which RHR alleged it was entitled to payment from Millennium as a result of the data breach. RHR did never filed suit.

    St. Paul filed suit for a declaratory judgment that it had no defense obligations and moved for summary judgment. RHR argued St. Paul was obligated to defend because: (1) the customers' loss of use of their credit cards, and the inevitable replacement of the cards, was covered as "property damage;" and (2) the costs incurred by RHR in complying with the notification statutes were covered under the policy. 

    The court noted there was no underlying complaint, so it looked at RHR's Notice of Claim and demand letter. The Notice of Claim had no substantive information other than the fact that a 'credit card systems breach occurred. Details in the demand letter were also sparse, but it specifically stated that Millennium "made private information known to third parties that violated a credit care holder's right of privacy." Therefore, the court addressed St. Paul's duty to defend under the personal injury provisions of the policy.

    The policy defined "personal injury" as an "injury other than bodily injury or advertising injury, that's caused by a personal injury offense." A "personal injury offense" included "making known to any person or organization covered material that violates a person's right of privacy." The parties disputed whether the "making known" requirement was met. The parties agreed that "making known" was synonymous with "publication." 

    The court determined there was no publication. The CGL policy required covered personal injuries to result from the insured's business activities. RHR's alleged injuries did not result from Millennium's business activities but rather the actions of third parties. Therefore, RHR's personal injury claim was not covered under the policy and St. Paul had no duty to defend.