Insurance Law Hawaii

Federal District Court Submits Certified Question to Maryland Court of Appeals on COVID-19 Claim

    In an unusual move for a federal district court handling COVID-19 claims, a certified question was submitted to the Maryland Court of Appeals for an interpretation of state law. Tapestry, Inc. v. Factor Mut. Ins. Co., 2022 U.S. Dist. LEXIS 75665 (D. Md. April 25, 2022). 

    Tapestry owned three luxury accessory lifestyle brands: Coach, kate spade new york, and Stuart Weitzman. Before the pandemic, Tapestry had 1540 retail and outlet stores under its three brands, with 414 stores in the United States. Tapestry employed approximately 16,000 people across the United States.

    Tapestry suffered considerable losses due to the Coronavirus. When Tapestry filed its First Amended Complaint, at least 1,676 of its employees had confirmed they contracted COVID-19. Tapestry alleged that the Coronavirus was present in its stores. Given the high prevalence of infectious COVID-19 cases in Maryland, Tapestry argued it was statistically certain that Coronavirus droplets and aerosols were frequently dispersed into the air and on property in, on and around the Tapestry stores. 

    Tapestry had an all risk commercial property policy from Factory Mutual Insurance Company. Coverage was denied and Tapestry filed suit. Factory moved to dismiss Tapestry's First Amended Complaint. In response, Tapestry asked the court to certify a question to the Maryland Court of Appeals asking whether a policy covering "all risks of physical loss or damage" was triggered when a toxic, noxious, or hazardous substance - such as COVID-19 - that was physically present in the indoor air damages property or causes loss of the functional use of the property?

    Factory opposed the motion and noted that the court had previously denied a motion to certify a similar questions whether the effect of the Coronavirus on a property could constitute 'physical loss or damage" to the property. In the court's view, however, the prior cases were distinguishable because the policy language at issue was different and the prior cases did not include specific allegations that the insureds' properties had in fact been contaminated by the Coronavirus. The court reasoned that a property could arguably be physical degraded - if only temporarily - by the existence of coronavirus in the air.      

    This case was appropriate for certification because there was no controlling appellate decision or statute on point. Therefore, the motion to certify was granted.

Insurer's Motion To Dispose of Bad Faith Claim Fails

    The court denied the insurer's motion for partial summary judgment seeking to dismiss the insured's claim for bad faith in handling his claim. Davis v. Allstate Indem. Co., 2022 U.S. Dist. LEXIS 93475 (C.D. Cal. April 15, 2022).

    On February 5, 2012, Terry Davis had an auto policy with Allstate providing $30,000 in uninsured motorist (UM) bodily injury coverage and $100,000 in medical payments coverage. Mr. Davis was involved in an auto accident with an uninsured motorist. The next day, he reported the accident to Allstate. Allstate confirmed that the at-fault driver was uninsured and opened a UM bodily injury claim file. 

    On January 15, 2014, counsel for Mr. Davis sent Allstate a letter demanding UM coverage. An Allstate claim handler reviewed Mr. Davis' medical records and noted they were related to prostate, urinary tract, and constipation issues which pre-dated the accident. In March 2014, Allstate asked Mr. Davis to provide there years of historical medical records. Starting in October 2014, Allstate sent Mr. Davis monthly letters that claimed it still did not have the information needed to evaluate the claim. On February 25, 2015, an Allstate representative told Mr. Davis's counsel that the medial records revealed many illnesses that were not acute and appeared to be unrelated to the accident. Counsel did not return subsequent calls from Allstate. Allstate closed Mr. Davis's claim on June 16, 2015. The parties never commenced UM arbitration.

    Davis filed suit alleging Allstate breached the covenant of good faith and fair dealing. Allstate moved for summary judgment arguing (1) Mr. Davis's claim was time barred or (2) there was a genuine fact dispute as to when his injuries originated which precluded a finding of bad faith. 

    The court first found that the claim was not time-barred. At no point within five years did Allstate commence, or offer to commence, arbitration proceedings after Mr. Davis's request. Under California law, a cause of action to compel arbitration of an uninsured motorist claim did to accuse, and the statute of limitations did not begin to run, until one party refused to submit to arbitration. Mr. Davis's cause of action accrued on January 15, 2019 and he filed his complaint on June 3, 2020. Therefore, he filed within the two year statute of limitations. 

    Next the court found that the investigation could be found to have been conducted in bad faith. Therefore, Allstate was not entitled to a genuine dispute defense. Based upon the medical records, Allstate believed the injuries were due to a pre-existing condition. Allstate ignored that a severe car accident, in which Mr. Davis's car was t-boned and suffered major damage, may have caused new issues that related to his prior condition but were in fact novel. A reasonable jury could find that Allstate acted unreasonably in determining that Mr. Davis's injuries were not caused by the accident but instead were pre-existing conditions. Therefore, Allstate's motion on the bad faith claim was denied. 

Don't Give Up Yet - Another COVID-19 Victory for Policyholders

    The Louisiana Court of Appeals reversed the lower court's decision, finding there was business interruption coverage for losses due to government shutdown orders related to the COVID-19 pandemic. Cajun Conti LLC v. Certian Underwriters at Lloyd's, 2022 La. App. LEZXIS 939 (La. Ct. App. June 15, 2022).

    The insured owned a restaurant in the French Quarter of New Orleans. Prior to the COVID-19 pandemic, the insured employed 200 people and could accommodate up to 500 guests at a time. Government shutdown orders limited restaurant operations to take out and delivery services in March 2020. The insured reopened on May 16, 2020, but in limited capacity to comply with the updated mayoral guidelines. 

    On March 16, 2020, the insured filed suit for a declaratory judgment that the Lloyd's policy covered losses due to the pandemic. The policy covered losses due to "direct physical loss of or damage to" the insured property. Lost business income and extra expenses were covered for losses sustained due to necessary suspensions of the property's operations during the "period of restoration." Lloyd's filed a motion for summary judgment arguing that the claims were not covered because there was no "direct physical loss of or damage to" property. The motion was denied and a bench trial proceeded. The trial court rendered judgment denying the insured relief and an appeal was filed.

    The court of appeals noted that the "all-risk" policy covered loss of business income sustained due to necessary "suspension" of operations during the "period of restoration." The "suspension" had to be caused by "direct physical loss of or damage to the property." The policy did not define "direct physical loss' or "damage." 

    "Suspension" was defined in the policy as the "slowdown or cessation of our business activities." Therefore, the complete cessation of operations and an uninhabitable property were not required. Suspension included the slowdown of business activities, which occurred here, as well as the compete cessation of business operations. 

    Lloyd's pointed to recent cases in other jurisdictions that interpreted "physical" in relation to coronavirus claims as requiring a tangible or corporeal loss of property or damage. These cases were not binding on this court, however. 

    The court found the policy ambiguous.  Under one reasonable interpretation, suspension of business operations due to "direct physical loss of or damage to the property" meant the loss of the property's full use, as Lloyds argued. The insured's expert opined that the contagion-causing viral particles persisted in the air of the premises. The presence of COVID-19 substantially diminished the usable space of the property.

    Another reasonable interpretation was that the suspension of business operations due to "direct physical loss of or damage to the property" required the full loss of the property's use, a situation distinct from the loss of the property's full use. Under this scenario, the insured would have had to shut down the restaurant completely for some period of time in order to qualify for coverage.

    The presence of this ambiguity and the existence of two equally reasonable interpretations as to what constituted a "direct physical loss of or damage to" the insured property meant the policy was construed in favor of coverage.

    The ambiguity allowed the court to consider parole evidence. The court noted that when the policy was issued, Lloyd's could have included a viral exclusion to the policy. The insured testified it would not have purchased the policy with such an exclusion. This testimony provided insight regarding how the insured reasonably construed the policy at the time of its purchase. 

    Consequently, the judgment of the trial court was reversed. The court held that coverage existed for loss or damage caused by "direct physical loss of or damage to" the insured premises as a result of contamination by COVID-19. 

 

Rare Policy Language Gives Insured Rare Victory on COVID-19 Claim

    The Appellate Division of the New York Supreme Court affirmed the lower court's denial of a motion to dismiss the insured's business interruption claim arising from COVID-19 closures. New York Botanical Garden v. Allied Work Assur. Co. (U.S.), 2022 N.Y. App. Div. LEXIS 3792 (N.Y. App. Div. June 14, 2022). Our post on the lower court's decision is here.

    The insured was forced to cease operations after executive orders by the governor and mayor were issued in March 2020. The insured also had to reduce its in-person workforce by 100%. The insured's claim for business interruption and contingent business interruption were denied by Allied. The insured sued for a declaratory judgment.

    Allied issued a Pollution Legal Liability policy with unusual language for purposes of business interruption and COVID-19 claims. The policy defined "contingent business interruption" as "the necessary suspension of your business operations at a location owned  . . . as a result of an order by a govern body denying access to the location . . . provided that" the suspension and the order must be "caused solely and directly by a pollution incident on, at or under an independent location." "Independent location" was defined as "a location that is not and was not at any time a location owned, leased, managed, operated or used by an insured."

    Allied agreed COVID-19 constituted a "pollution incident," but moved to dismiss. The lower court denied the motion and Allied appealed.

    The appellate court affirmed. Allied failed to establish that contingent business interruption coverage was available only if the insured was completely denied access to its property. The policy contemplated coverage for periods when the insured would have some temporary access to the property, including periods involving potential partial resumption of operations to mitigate damages, which for the insured included maintaining its extensive plantings. The cases relied upon by Allied involved civil authority coverage in property liability policies and periods of complete denial of access due to physical damage and were inapposite. 

    The appellate court also affirmed the decision not to dismiss the insured's claim for bad faith. 

Insurer Must Defend Allegations of Sexual Abuse

    The Federal District Court, District of New Mexico, found that the insurer had a duty to defend allegations of sexual abuse lodged against the insured. Proassurance Spec. Ins. Co. v. Familyworks, Inc., 2022 U.S. Dist. LEXIS 71434 (D. N.M. April 19, 2022).

    Four lawsuits relating to the sexual abuse of minor foster children were filed against Familyworks. It had a policy from ProAssurance first purchased in April 2014. Familyworks continued to purchase policies form ProAssurance each year through 2018. The policies included a Sexual Misconduct Endorsement which provided limited coverage for claims of negligence arising out of alleged sexual misconduct.

    On July 2, 2018, the New Mexico Child Youth and Families Department (CYFD) wrote a letter to Familyworks titled "Imposition of Emergency Sanction." The letter was directed at alleged abuse by one family and stated that Familyworks had been found noncompliant with various certification and licensing requirements. The letter restricted Famiyworks from accepting any new clients until the identified deficiencies were corrected. A second letter dated July 16, 2018 revoked Familywork's treatment foster care license effective August 30, 2018. A third letter dated July 23, 2018 extended the revocation date to September 21, 2018.

    Familyworks applied to renew its coverage with ProAssurance on August 16, 2018, following receipt of all three letters but before its license was actually revoked. Familyworks reported that the one family was currently under investigation and that Familyworks had revoked their foster care license. Familyworks did not disclose the impending revocation of its own license. A new policy was issued. On September 27, 2018, Familyworks informed ProAssurance that it had closed its business and asked the the policy be cancelled. Familyworks asked for a quote for tail coverage. ProAssurance issued a Reporting Endorsement covering professional liability claims reported during the extended period after cancellation of the policy which would be deemed to have been reported on the last day of the policy period.  

    Following the revocation of Familyworks' license, four lawsuits were filed against Familyworks based on alleged sexual abuse of first children by Defendants Clarence and Debbie Garcia. All four suits alleged that Familyworks was negligent in retaining and supervising the Garcias and in failing to ensure the minors' safety. 

    ProAssurance filed this declaratory judgment action seeking declarations that (1) no coverage existed under the Reporting Endorsement because it was void ab initio and could be rescinded, and (2) no coverage existed under the policies because the alleged sexual abuse did not constitute an "occurrence." 

    The court found that the underlying complaints alleged an "occurrence." Although the underlying plaintiffs alleged that Familyworks intentionally placed the children with the Garcias, none alleged that Familyworks intended the resulting sexual abuse. Whether Familyworks intended to place minor children with the Garcias or retain them as foster parents was immaterial to whether the alleged abuse constituted an "occurrence." Therefore, ProAssurance had a duty to defend.

    ProAssurance next argued that a policy exclusion for "liability arising out of any wilful, wanton, fraudulent, dishonest, criminal, reckless, intentionally wrongful or malicious act or omission." Whether the exclusion barred coverage based on a third-party contractor's criminal or intentional acts or whether it turned solely on the insured's state of mind, was at the very least ambiguous. Therefore, the exclusion would bar coverage only if Familyworks acted with the requisite intent. Considering only the duty to defend, the underlying principal claims were for negligence and/or vicarious liability. Therefore, the allegations fell "arguably" within the scope of coverage, triggering a duty to defend.

    Finally, the court found that ProAssurance was not entitled to rescission of the policy. The court noted that Familyworks actually remained licensed at the time of the application for the Reporting Endorsement. Therefore, the request for rescission was denied.

    

South Carolina District Court Finds No Duty to Defend Under Hawaii Law

    Applying Hawaii law, the district court found the insurer had no duty to defend a suit for personal injury caused by environmental harm. Koppers Performance Chems., Inc. v. Travelers Indem. Co., 2022 U.S. Dist. LEXIS 71642 (D. S.C. April 18, 2022).

    From 1979 to 1982, Argonaut-Midwest Insurance Company (Argo) issued policies to Osmose Wood Preserving Co. of America, Inc. and Griffin Forest Industries, Inc. DBA Hawaii Wood Preserving Co, and DBA Osmose Pacific, Inc. a subsidiary. The 1979 Argo policy was issued pursuant to an application submitted by Triad Insurance Agency in Honolulu.

    On November 24, 2014, Philip Riley sued Koppers Performance Chemicals, Inc. aka Osmose Wood Preserving Co. of America. Riley alleged that he was a citizen of and resided in South Carolina and that Koppers manufactured the wood treatment chemicals (namely cremated copper arsenate (CCA)) that caused him to developer cancer due to exposure at his job. Nearly two years later, Koopers tendered the complaint to Argo. Koopers also provided one page from Riley's deposition where Riley testified that the "timeframe that I'm talking about" was "from '78 to '92, from the time I was born until I stopped working with CCA."

    Argo denied coverage because Koppers was not a named insured. Koppers eventually settled claims with Riley for $150,000. Koopers sued Argo to recover costs associated with defending and settling the underlying action. 

    The court first found that the Argo policies were governed by Hawaii law. The policies were obtained through a Hawaii broker and insured property exclusively within Hawaii. Riley was a citizen of and allegedly injured by Koppers' product in South Carolina. Therefore, there was no nexus between the Argo policies and South Carolina. 

    The court next held that the complaint did not trigger coverage under the Argo policies. The original complaint did not name any of the DBA entities or describe Koppers' Hawaii operations. The complaint did not allege bodily injury during the applicable policy periods from around 1979 to around 1982. Therefore, under Hawaii's complaint allegation rule, the duty to defend was not triggered by the original complaint. The duty to defend was limited to situations where the underlying pleadings alleged a claim for relief which fell within the terms for coverage under the policy. The complaint here contained no such allegations. The fact that Koppers submitted to Argo an excerpt from Riley's deposition along with the original complaint did not change this conclusion. 

    [Here, the court seems to ignore the extrinsic evidence rule utilized by Hawaii courts: if extrinsic evidence outside the pleadings favors the insured, if must be considered for purposes of determining a duty to defend. Dairy Roads Partners v. Island Ins. Co., Ltd., 92 Haw. 398, 421-22 (2000)].

    Accordingly, Argo had no duty to defend or indemnify Koppers regarding the underlying action. 

Treble Damages Awarded After Insurer Denies Coverage for Collapse

    The Fourth Circuit upheld the district court's decision that a collapse was covered, but reversed the denial of treble damages to the insured. DENC, LLC v. Phila. Indem. Ins. Co., 2022 U.S. App. LEXIS 10443 (4th Cir. April 18, 2022). The district court decision was summarized here. 

    DENC owned The Crest, an apartment building leased to Elon University for student housing. Philadelphia Indemnity Company insured the property. In January 2018, students gathered on a second-floor breezeway for a party. Partygoers began jumping in the breezeway, which caused an abrupt collapse. Observers noticed that the breezeway was hanging down by more that a foot. 

    DENC filed a claim with Philadelphia the next day. An adjuster was sent to inspect the breezeway. By that time, the city had condemned The Crest. The adjuster said that undiscovered "water damage which occurred over an extended period of time" caused the loss. 

    The policy excluded loss caused by "continuous or repeated seepage or leakage of water that occurs over a period of 14 days or more." The policy had a "Collapse Endorsement" that excluded an abrupt falling down or caving in of property. This exclusion did not apply to collapse caused by "weight of people or personal property," however.

    Philadelphia sent DENC two letters. The first was a reservation of rights letter, explaining that Philadelphia was conducting an investigation. The second letter, sent two days later, said payment would be issued to DENC for "damages or injuries sustained." Philadelphia then hired a structural engineer to assess the breezeway. He concluded that "long-term water intrusion" caused the loss. After reviewing the engineer's report, Philadelphia sent a third letter stating the claim was denied because the damage was the result of long-term water intrusion and deteriorated wood framing. The letter never referenced the earlier letter in which Philadelphia said it would pay the claim.

    DENC filed a declaratory judgment action. The district court found that the collapse of the breezeway covered because it was caused by the "weight of people" and it was an "abrupt collapse" caused by hidden building decay or defective construction methods. The court also granted summary judgment on one of four claims under the  Unfair and Deceptive Trade Practices Act (UDTPA) because Philadelphia's denial letter failed to reasonably explain the denial's basis in the insurance policy in relation to the facts. But the district court granted summary judgment to Philadelphia on the other UDTPA claims, as well as DENC's bad-faith claim. The district court held a hearing on damages. It awarded DENC's temporary student housing expenses, but denied treble damages because DENC failed to show that Philadelphia's UDTPA violation proximately caused its contract damages. Finally, fees were awarded to DENC because of the deceptive denial letter and Philadelphia's failure to make a reasonable settlement offer. 

    The Fourth Circuit affirmed the decision regarding coverage for the collapse and for the extra expenses DENC had to pay when it had to relocate its tenants to similar housing while repairs were made.

    The Fourth Circuit also agreed that Philadelphia violated the UDTPA. The district court erred, however, in failing to award treble contract damages under UDTPA. DENC proved that Philadelphia's UDTPA violation proximately caused its damages. Finally, fees were appropriately awarded to DENC. 

 

Motion in Limine Ruling Allows Evidence of Bad Faith Claims Handling, but Not of Bad Faith Conduct

    Under Florida law, the court granted the insurer's motion in limine to exclude evidence of bad faith until a breach of the policy was established, but denied the motion insofar as it sought to exclude evidence of bad faith claims handling. Monterey at Malibu Bay Condo. Ass'n v. Empire Indem. Ins. Co., 2022 U.S. Dist. LEIXS 68013 (S.D. Fla. April 13, 2022).

    The Condominium Association filed suit for declaratory relief after its property was damaged by Hurricane Irma. The insurer, Empire Indemnity Insurance Company, made a partial payment, but the AOAO alleged Empire breached the contract by failing to fully indemnify the AOAO. Before trial, Empire moved to preclude the AOAO from introducing evidence and testimony alleging bad faith conduct. It also sought to exclude references to its "bad faith" or "good faith" conduct because such references could confuse the jury and unduly prejudice Empire.

    The court agreed that such testimony should be precluded. In Florida, a bad faith action was not ripe until after the coverage action was resolved. This case was not a bad faith action but a coverage action. Therefore, evidence of bad faith conduct was inadmissible. 

    However, any evidence that was relevant to both the AOAO's breach of contract claim and a potential bad faith claim was admissible. References, testimony, and evidence regarding Empire's handling of the coverage claim that could also be relevant to a bad faith action were admissible.

    Finally, the court agreed that reference, testimony, and evidence of personal opinions regarding insurance companies and why people purchase insurance was inadmissible.

Disagreeing with Hawaii Supreme Court, South Carolina Holds Post-Lost Assignment Valid

    The South Carolina Supreme Court held that a post-loss assignment of rights under the policy was valid even though consent of the insurer was not requested. PCS Nitrogen, Inc. v. Cont'l Cas. Co., 2022 S.C. LEIXS 54 (S.C. April 13, 2022).

    In 1966, Columbia Nitrogen Corporation (Old CNC) began operating a fertilizer manufacture site. The insurers issued primary and excess liability policies to Old CNC with policy periods ranging form 1966 to 1985. The policies included an anti-assignment clause which read,"Assignment of interest under this policy shall not bind the company until its consent is endorsed hereon."

    Old CNC ceased all fertilizer production at the site in 1972 and sold the site in 1985. In 1986, Old CNC sold assets related to its fertiliser production business to CNC Corp. (New CNC). New CNC assumed some of Old CNC's liability, including those related to Old CNC's fertilizer production business. Old CNC dissolved. In 1997, New CNC became PCS Nitrogen (PCS) through mergers. 

    In 2005, Ashley II of Charleston, LLC, then owner of the site, filed a declaratory judgment action against PCS alleging PCS was liable under CERCLA for environmental remediation at the site. Ashley II alleged Old CNC contaminated the site and that PCS was liable for remediation. The federal district court found PCS liable under CERCLA.

    In this case, PCS sought a declaration that the insurers were obligated to provide coverage for its defense costs and environmental liabilities stemming from the CERCLA litigation. PCS contended that the insurers' consent to the assignment was not required because the assignment took place after the loss occurred. The circuit court granted summary judgment to the insurers, ruling the assignment was unenforceable as a matter of law because Old CNC did not secure the insurers' consent. The circuit court ruled that the assigment was not a post-loss assignment because, at the time of the assignment, no judgment had been entered against Old CNC. 

    On appeal, the Supreme Court noted that the majority rule was that such a provision did not bar an assignment made after a loss. The insurers relied upon decisions from Oregon and Hawaii (Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357 (2007). The South Carolina court refused to follow Hawaii and Oregon, and adopted the post-loss exception. Insurer consent was not required for an assignment of liability insurance coverage rights made after a loss. 

    The court next considered when the loss occurred and whether it was post-assignment. Again, the court followed the majority of jurisdictional and held the "loss" in the context of the post-loss exception, was synonymous with the "occurrence." In this case, the loss occurred before Old CNC executed the assignment in 1986.

    The court also agreed with PCS's public policy argument that relieving the insurers of their contractual duty to provide coverage would give the insurers a windfall. 

Hawaii Legislature Passes Two Insurance-Related Bills in 2022 Session

    The 2022 Hawaii legislative session has adjourned with two insurance-related bills passed and and now pending before the governor. The new legislation amends existing statutes that are not within the everyday parlance of coverage lawyers. The bills are as follows:

    HB1980 - The bill modifies Haw. Rev. Stat. 346-59.1 regarding coverage for telehealth. Medicaid, health insurers, mutual benefit societies and health maintenance organizations are permitted, but not required, to cover telephonic behavioral health services under certain circumstances. The legislation further clarifies that telephonic services do not constitute telehealth. 

    HB 2112 - This legislation would amend Haw. Rev. Stat. 431:4A-101, or the National Association of Insurance Commissioners' Credit for Reinsurance Model Law. The Act conforms to the requirements of the bilateral agreements on insurance and reinsurance between the United States and the European Union and the United Kingdom, and ensures the states' regulatory authority remains intact and is not preempted by federal law.