Insurance Law Hawaii

Cyber Breach Claim Survives Insurer's Motion to Dismiss

    AIG's Motion to Dismiss the insured's claim based upon a fraudulent transfer of funds was largely denied by the court. SS&C Tech. Holdings v. AIG Spec. Ins. Co., 2019 U.S. Dist. LEXIS 194196 (S.D. N. Y. Nov. 6, 2019).

    SS&C was a global provider of software and software-enabled services. In March 2016, unknown third parties using stolen credentials sent transfer requests via e-mail to SS&C, falsely claiming to be acting on behalf of Tillage Commodities Fund, L.P. Over the court of three weeks, SS&C transferred over $5.9 million from Tillage's accounts to certain bank accounts in Hong Kong, as requested by the fraudsters. 

    Tillage sued SS&C for gross negligence. The case was ultimately settled.

    SS&C held a policy from AIG to protect losses resulting from claims against SS&C due to its negligence, errors or omissions, relating to the performance of its professional services. AIG agreed to defend the underlying case, but denied indemnity coverage based upon exclusions in the policy. SS&C sued AIG for (1) breach of contract; (2) declaratory judgment that there was coverage under the policy; and (3) breach of the implied covenant of good faith and fair dealing. 

    Exclusion 3 (a) of the policy denied coverage for losses in connection with claims alleging dishonest, fraudulent, criminal or malicious acts, errors or omissions . . ., "provided, however, AIG will defend suits that allege any of the foregoing conduct, and that are not otherwise excluded until there is a final judgment . . . at which time the Insureds shall reimburse AIG for Defense Costs." 

    AIG argued that the first clause before the "provided, however," meant that the exclusion applied not only to "dishonest, fraudulent, criminal or malicious acts, errors, or omissions by its insured, but also broadly to such acts committed by third-party fraudsters, such as here. The argument failed. Coupling the first clause with the "provided, however" clause of the same sentence clearly indicated that Exclusion 3 (a) applied only to dishonest, fraudulent, criminal or malicious acts committed by SS&C, and not to acts such as committed by third-party fraudsters. At the very least, an ambiguity existed, which construed in favor of SS&C. 

    The court agreed to dismiss the second count for declaratory judgment because it was duplicative of the other counts. The third count on bad faith survived the motion to dismiss, however. If SS&C's allegations were true, AIG improperly invoked Exclusion 3 (a) to deny coverage and AIG impaired SS&C's contractual rights. The fact that AIG engaged in allegedly pretextual reading of the policy to deny coverage could qualify as an act of bad faith. 

Insurer Awarded Summary Judgment on Collapse Claim

    The Eleventh Circuit agreed with the insurer that there was no coverage for a collapse under the policy. S.O. Beach Corp. v. Great Am. Ins. Co.,2019 U.S. App. LEXIS 32569 (11th Cir. Oct. 31, 2019).

    S.O. Beach Corporation and Larios on the Beach, Inc ("Larios") owned a building in Miami Beach. Sometime between march 4, 2012 and April 10, 2013, Larios discovered that parts of the first three floors of its building had caved in to varying degrees. The primary cause of the collapse was a wooden support beam that had severely rotted. Larios found a broken pipe that was gushing water onto the beam, causing deterioration. Larios was forced to evacuate the building until the damage was repaired. 

    Larios submitted a claim under its all-risk policy with Great American. The policy required that a collapse an "abrupt falling down or caving in of a building or any part of a building" to be covered. Before a coverage decision was made, Larios sued for breach of contract. The parties filed cross-motions for summary judgment. The district court granted Great American's motion and denied Larios' motion. 

    On appeal, the court noted that Larios carried its initial burden under the all-risk policy of showing that a loss - the purported collapse - happened while the policy was in effect. The burden shifted to Great American to prove that the cause of the purported collapse was excluded under the terms of the policy. Great American produced documentary evidence along with testimony from expert witnesses and fact witnesses showing that the purported collapse was gradual, not abrupt. 

    Therefore, the burden shifted back to Larios to prove that an exception to the exclusion applied. Larios argued the policy was ambiguous. But the court found there was no conflict between explicitly covering collapses that resulted from a gradual cause like decay and limiting coverage to collapses that were abrupt. Decay was just one of over a dozen covered causes listed in the policy's collapse coverage provisions. Some of the causes were abrupt, like "lightning" or an "explosion." Others were more gradual, like "decay" or "water damage." But regardless of whether the cause of a collapse was gradual or abrupt, the collapse itself was covered only if it was abrupt. Larios' contention that the collapse provisions were ambiguous was rejected and the district court was affirmed. 

    

On to Year Thirteen for Blog

    Insurance Law Hawaii hits twelve years of existence this week, 1347 posts later. We started in December 2007. We continue in order to keep up on developing issues in insurance law. We strive to keep readers abreast of new developments in cases from Hawaii and across the country. 

    Other Damon Key blogs to check out are www.inversecomdemnation.com [here] authored by Robert Thomas, Mark Murakami's  www.oceanlawhawaiil.com [here] and www.hawaiiconstructionlaw.com [here] by Anna Oshiro.

    Thank you for following along as we head into our thirteenth year.

Insurer Rejecting Construction Defect Claim Must Share in Defense Costs

    One insurer, who accepted the tender of defense in a construction defect case, successfully moved for summary judgment against the second insurer, who denied the insured's tender. Interstate Fire & Cas. v. Aspen Ins. UK Ltd., 2019 N.Y. Misc. LEXIS 5800 (N.Y. Sup. Ct. Oct. 25,2019).

    Standard Waterproofing Corporation was hired by the construction manager, G Builders, to perform waterproofing work as part of condominium conversion project. After the project was completed,the condominium occupants experienced water damage in their units. The Condominium Board retained an engineer who reported numerous issues of water infiltration relating to Standard's work. 

    The Condominium Board filed suit against the construction manager, who filed a third party complaint against Standard. Standard tendered to four different insurers, including plaintiff Interstate and defendant Aspen. Interstate agreed to defend, while Aspen and the other two insurers declined. Aspen argued there were no allegations of an occurrence resulting in property damage during its policy periods. Interstate filed for declaratory relief against Aspen and Standard.

    Standard and Interstate moved to dismiss. The court rejected Aspen's arguments that the other two insurers were necessary parties. Complete relief could be accorded to the existing parties without the other two insurers being involved. 

    Turning to Interstate's motion for summary judgment, the court determined that Aspen had a duty to defend. The pleadings in the underlying case alleged that the renovation work "caused the condominium and its unit owners significant injury and damage." The third-party complaint alleged that Standard's work and culpable conduct led to the condominium damage. Aspen's CGL policy covered consequential property damage due to a contractor's faulty workmanship as "property damage" caused by an "occurrence," even if the cost of repairing the defective work itself was not covered. Therefore, the underlying pleadings created a reasonable possibility of coverage, triggering Aspen's duty to defend. 

    Accordingly, Aspen was obligated to reimburse Interstate for a portion of the defense costs. Where in insurer failed to undertake the common insured's defense and the other insurer was forced to defend alone and then seek reimbursement, New York courts applied the allocation method most favorable to the insurer who properly defended. Given the length of their respective policy periods, Interstate's share was 44% and Aspen's share was 56%. Interstate was also entitled to prejudgment interest at 9% from the date each invoice was paid. 

Collapse of Breezeway Attached to Building Covered

    The federal district court found that a breezeway that collapsed during a party was covered by the commercial property policy. DENC, LLC v. Philadelphia Indem. Ins. Co., 2019 U.S. Dist. LEXIS 179083 (M.D. N.C. Oct. 15, 2019).

    DENC owned an apartment complex that was insured by Philadelphia under an all-risk policy. During an early morning party, a large number of students gathered on the second-floor breezeway for a party. The students started jumping in the breezeway when a certain song started playing. The floor abruptly collapsed underneath the students. 

    Philadelphia sent an adjuster to inspect the breezeway a couple days later. He wrote to Philadelphia that "the sole and proximate cause of the loss is water damage occurring over an extended period of time causing the second floor breezeway to sage and the light weight concrete to crack." Shortly thereafter, the building was condemned. A structural engineer found multiple ways in which water had seeped into the breezeway's wood framing and photographed the resulting biological growth and wood decay. He concluded that the building had sustained significant long-term water intrusion which resulted in the wood framing inability to support the loads. The water intrusion was caused by the failure to properly install a water management system on the walls, a properly integrated waterproof system for the walkway slab and framing configuration, and improper venting of dryers.

    DENC retained an engineer who testified that the breezeway was sagging because the concrete had broken. 

    Philadelphia denied coverage and DENC sued Motions for summary judgment were filed.

    A collapse endorsement provision in the policy provided coverage in certain circumstances and excluded coverage in others, in a confusing morass of definitions, exclusions, and exceptions. An abrupt falling down or caving in of a building was excluded. On the same page, however, a collapse resulting on a "covered Cause of Loss" was covered. Collapsed caused by weight of people was a Covered Cause of Loss. 

    DENC presented circumstantial evidence that the collapse was at least partially caused by the weight of people. The breezeway fell while a large number of people were standing, jumping, and dancing on it. This was enough to establish coverage. 

    Philadelphia argued there was no coverage for parts of buildings that were "standing." Here, the building itself remained standing, but the breezeway, which was party fo the building, was no longer standing. The evidence was undisputed that it had fallen approximately one foot and that part of the breezeway was on the ground below. Thus, part of the building was not standing and the exclusion did not apply. 

    Therefore, the collapse of the second floor breezeway was a covered loss under Philadelphia's policy. 

Insurer Must Honor Written Representation Made By its Agent in Certificate of Insurance

    Answering a certified question from the Ninth Circuit, the Washington Supreme Court responded that an insurer's agent who makes a representation in a certificate of insurance binds the insurer. T-Mobile USA Inc. v. Selective Ins. Co. of Am., 2019 Wash. LEXIS 659 (Wash. Sup. Ct. Oct. 10, 2019).

    Two T-Mobile companies were involved in the case: T-Mobile USA and To-Mobile Northeast. T-Mobile NE wanted to construct a cell phone tower on a rooftop in New York City. A contract between T-Mobile NE and the contractor required the contractor to obtain a CGL policy, to annually provide T-Mobile NE with certificates of insurance showing the policy's coverage, and to name T-Mobile NE as an additional insured under the policy. T-Mobile USA was not a party to the contract, but was aware of it and approved the contract as to form.

    Selective issued the policy to the contractor. The policy provided that a third party would automatically become an additional insured if the contractor and the third party entered into their own contract and that contract required the contractor to add the third party to its policy as an additional insured. Over seven years, Selective's agent issued a series of certificates of insurance, including one that named T-Mobile USA, Inc., "its Subsidiaries and Affiliates" as additional insureds with respect to certain areas of coverage. Selective never objected to the agent's issuance of the certificates. 

    The certificate also included pre-printed industry-standard disclaimers. It stated in bold capital letters that the certificate "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." 

    Eventually, the owner of the rooftop on which the cell tower was constructed sued the contractor and T-Mobile USA, not T-Mobile NE. Selective accepted the contractor's tender, ,but rejected T-Mobile USA's tender. The building owner later amended its complaint, naming T-Mobile NE as as defendant and dropping T-Mobile USA. T-Mobile USA sued Selective for expenses incurred in defending itself in the underlying litigation. 

    T-Mobile USA, which is headquartered in the State of Washington, sued Selective there. The court granted summary judgment to Selective and dismissed all of T-Mobile USA's claims.

    T-Mobile USA appealed. The Ninth Circuit certified a question to the Washington Supreme Court, asking whether an insurer was bound by representations made by its authorized agent in a certificate of insurance with respect to a party's status as an addition insured, even though the certificate disclaimed its authority and ability to expand coverage. 

    The Washington Supreme Court determined that Selective was bound by the representations its agent made in the certificate of insurance. The Ninth Circuit had previously ruled that Selective's agent acted with apparent authority. This ruling conclusively resolved the issue. T-Mobile USA's objectively reasonable belief that the agent had authority to issue the certificate made its reliance on the certificate reasonable. The pre-printed disclaimers were ineffective because they were general boilerplate, whereas the additional insured statement was specifically written into the certificate. 

    Therefore, the certified question was answered as follows: an insurance company's agent who makes an authoritative representation binds the insurance company, even when that specific representation is transmitted via a certificate of insurance and accompanied by general disclaimers. 

    

Some Insurers Dismissed, Others Are Not in Claims for Faulty Workmanship

    The insured Developer survived a motion to dismiss by one of several carriers who were asked to defend against claims for faulty workmanship. East 111 Assoc. LLC v. RLI Ins. Co., 2019 N.Y. Misc. LEXIS 5331 (Oct. 4, 2019).

    Developers sponsored a residential condominium project and sold all units. The owners subsequently sought damages for $881,450 for alleged design and construction defects, and asserting causes of action for, among other things, breach of contract, specific performance and negligence. The underlying action settled for $350,000. Developers sought coverage from its insurers. 

    The Developers sued the carriers for a declaratory judgment that they were entitled to a defense. Developers had a CGL policy issued by Mt. Hawley. Developers were also additional insureds in policies issued to subcontractors by James River, Admiral and Selective. The insurers moved to dismiss. 

    The insurers' breach of contract exclusion precluded coverage for "property damage . . . arising directly or indirectly out of . . . (a) Breach of express or implied contract; (b) Breach of express or implied warranty . . ." Developers argued that the owners' cause of action for negligence did not fall within this exclusion. However, the negligence cause of action alleged - as did the breach of contract - that Developers constructed the building with design and construction defects and not in accordance with the offering plan. Since all of the alleged "property damage arose directly or indirectly" from Developers' alleged breach of express or implied contract by their failure to deliver a building free of defects, the underlying action fell within the breach of contract exclusions. Therefore, motions to dismiss by James River, Admiral, and Mt. Hawley were granted.

    The Developers were additional insureds under the Selective policy issued to Walsh, a subcontractor. The underlying complaint carried the possibility that Walsh's allegedly fault workmanship damaged other parts of the building - which was not, as a whole, Walsh's work - an "occurrence" giving rise to "property damage" could exist under the Selective policy. Accordingly, the alleged water damage triggered Selective's duty to defend Developers. 

Denial of Coverage Reversed, Remanded for Possible Reformation of Policy

    The Seventh Circuit reversed and remanded for consideration of reformation of the professional liability policy after the district court found there was no coverage. Crum & Forster Spec. Ins. Co. v. DVO, Inc., 939 F. 3d 852 (7th Cir. 2019).

    WTE-S&S AG Enterprise, LLC sued DVO for breach of contract. DVO designed and built machinery for generating electricity from cow manure which would then be sold to the electric power utility. DVO and WTE entered a Standard Form Agreement for such machinery. DVO allegedly did not properly design substantial portions of the systems, resulting in substantial damages to WTE.

    Crum defended under a reservation of rights, but later withdrew its defense. In the underlying suit, the court found in favor of WTE and ordered DVO to pay over $65,000 in damages and $198,000 in attorneys' fees. 

    Crum issued primary and excess policies to DVO, including E&O professional liability coverage. Crum agreed to pay "damages" or "cleanup costs" because of a "wrongful act." An exclusion added by endorsement precluded coverage for damages arising out of breach of contract. DVO argued the breach of contract exclusion was so broad as to render the E&O professional liability coverage illusory. The district court held the coverage was not illusory because it would still apply to third party claims. 

    The underlying complaint alleged that DVO was contracted to design and construct the machinery and, because of its faulty design, damages were incurred. That alleged claim arose out of the contract and therefore fell within the exclusion. The sole issue was whether the language in the breach of contract exclusion rendered the exclusion broader that the grant of coverage, and therefore rendered the coverage illusory. If the purported coverage proved to be illusory, a court could reform the policy to meet the insured's reasonable expectation of coverage.

    Based upon Wisconsin law, the Seventh Circuit found the policy illusory. There was no reason to believe that DVO in purchasing the coverage to provide insurance against professional malpractice claims had a reasonable expectation that it was obtaining insurance only for claims of professional malpractice brought by third parties. Because the breach of contract exclusion made the professional liability coverage ilusory, the contract should be reformed so as to meet the reasonable expectations of DVO as to the E&O policy's coverage for liability arising out of negligence, omissions, mistakes and errors inherent in the profession. 

    On remand, the district court was directed to consider DVO's reasonable expectations in securing the coverage, and the court could reform the contract so as to give effect to that expectation. 

Third Circuit Remands Denial of Coverage Based on Expected and Intended Definition of Occurrence

    While affirming the district court's denial of coverage under policies that defined occurrence as an accident, the Third Circuit remanded for further consideration of the policies containing an expected and intended definition of occurrence. Sapa Extrusions, Inc. v. Liberty Mut. Ins. Co., 2019 U.S. App. LEXIS 27668 (Sept. 13, 2019).

    Sapa manufactured aluminum extruded profiles which were used for door and window frames. A pretreatment coating process was used in several aluminum clad windows and doors. Several stages were involved including cleaning and degreasing to remove organic and inorganic materials, chemical etching, and chemical coating to assist with paint adherence. For decades, Sapa supplied profiles to Marvin Lumber and Cedar Company. Marvin incorporated these extrusions with other materials to manufacture aluminum doors and windows. If an extrusion was defective, the whole window or door would have to be replaced. Between 2000 and 2010, Sapa sold 28 million windows and doors.

    Marvin sometimes received complaints from customers that the aluminum parts of windows or doors would corrode. At first, Sapa tried to determine the nature of the problems and fix them. In 2010, Marvin sued Sapa, alleging Sapa made specific warranties to Marvin about its extrusions. Marvin sought monetary damages for economic losses stemming from investigating and responding to consumer complaints, identifying and qualifying alternative extrusion suppliers, replacing the failed extrusions, and experiencing lost sales and profits.  On the eve of trial, the parties settled for a large sum.

    Sapa held 28 CGL policies through eight carriers, covering the relevant period during which Sapa did business with Marvin. Only one carrier, Zurich, accepted the defense under a reservation of rights. Sapa sued the remaining carriers, asserting breach of contract under the 28 policies and seeking a declaratory judgment to recover the cost of the underlying settlement.

    The district court found there was no occurrence under any of the policies and there was no duty to indemnify. 

    The Third Circuit analyzed the policies under Pennsylvania law. Nineteen of the policies defined an "occurrence" as an accident. Under these policies, faulty workmanship did not constitute an accident as required to set forth an occurrence under the CGL policies.  A degree of fortuity was not present in a claim for faulty workmanship.

    Seven policies defined "occurrence" as "an accident, including continuous or repeated exposure to conditions, which results in . . . property damage neither expected nor intended from the standpoint of the Insured." The district court considered these policies together with the "accident" policies. The Third Circuit held the district court should have considered these poliies separately. The expected and intended definition of "occurrence" in these policies was ambiguous. Under the expected and intended definition, an "occurrence' included those conditions not of the same general type which the insured intended to cause.

    Two policies contained the injurious exposure definition of "occurrence."  The definition in these policies was identical to the expected and intended definition, except that it used the term "injurious exposure" instead of "accident. The district court did not analyze these policies separately, despite their unique wording. Therefore, the district court's decision was vacated as it related to these two policies and remanded for further individualized consideration. 

    

Auto Policy Provides No Coverage For Death Caused by Reckless Driving

    The Magistrate Judge for the Federal District Court of Hawaii recommended a finding that there was no coverage under the deceased driver's car rental policy or rental agreement for an accident caused by reckless driving. Praetorian Ins. Co. v. Estate of Apo, 2019 U.S. Dist. LEXIS 164489 (D Haw. Sept. 6, 2019). 

    The decedent was asleep in a rented vehicle when awakened by police. The decedent reversed the auto and collided with an police vehicle. A high speed pursuit then ensued. The decedent drove in the wrong direction on the opposing side of traffic at approximately 90 miles an hour and struck an oncoming vehicle, killing both the decedent the underlying plaintiff. 

    The vehicle driven by decedent had been rented to a friend, who loaned decedent the car. The rental agreement stated "None" for the listing of additional drivers. The agreement also stated, "under no circumstances shall vehicle be used, operated or driven by any other person." Praetorian insured the rented vehicle.

    The underlying lawsuit was filed against the decedent's estate. Thereafter, Praetorian filed an action for declaratory judgment that it had no duty to defend or indemnify. The estate did not answer and Praetorian filed Motion for Default Judgment or for Summary Judgment against the estate. No opposition to the motion was filed. 

    The court found that the decedent was not an insured under the policy. The policy defined "insured" as "you" and/or the rentee. The policy was therefore unambiguous that only the car rental company or the rentee qualified as an insured. The policy also stated it was subject to the terms, conditions, restrictions, and limitations contained in the rental agreement. Consequently, there was no coverage for the estate for the claims asserted in the underlying lawsuit. 

    As a result, the court found and recommended that the Motion be granted and that default judgment be entered against the estate and in favor of Praetorian.