Insurance Law Hawaii

Court Stays Coverage Action Filed under Declaratory Judgment Act

    The federal district court, district of Hawaii, stayed the coverage action to allow the underlying state court action to proceed, United States Fire Ins. Co. v. Prieto, 2020 U.S. Dist. LEXIS 106676 (D. Haw. June 18, 2020).

    In the underlying action, Aerica Cates sued defendant Prieto and the State of Hawaii in state court for Prieto's sexual abuse of of the couples' daughter during unsupervised visits. Cates accused the State of failing to take appropriate action following the pediatrician's reports of abuse and forcing the daugther to resume visitation with Prieto. Cates asserted claims of assault and battery, intentional infliction of emotional distress, negligent infliction of emotional distress and negligence against Prieto. The state filed a cross-claim against Prieto, asserting that any injuries sustained by Cates were the result of Prieto's wrongful acts and/or omissions.

    Prieto tendered the defense to his Homeowners carrier, United States Fire. US Fire agreed to defend under a reservation of rights, but then filed an action in federal district court for a declaratory judgment that it owed no duty to defend or indemnify. US Fire filed a motion for summary judgment. Prieto argued the court should decline to exercise jurisdiction.

    The court had discretion under the Declaratory Judgment Act to exercise its discretion under the factors enumerated in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942). Under the first factor, needless determination of state law, the court agreed the underlying liability action was a parallel state proceeding because the state and federal actions arose from the same factual circumstances. US Fire's duty to defend turned on whether allegations asserted in the state court action rose any possibility of coverage under the policy and its duty to indemnify rested on factual determinations made in the state court action. The existence of a parallel state action weighted strongly in favor of declining jurisdiction. 

    The court also agreed that, while it was capable of deciding the issues presented, proceeding with a declaratory judgment could result in the unnecessary determination of state law. Even if a federal declaratory judgment action did not present an open question of state law requiring resolution by a state court, it was not an abuse of discretion to decline jurisdiction. Finally, there was no compelling federal interest in this diversity case. Therefore, the first Brillhart factor of needless determination of state law weight in favor of dismissal. 

    The second factor, forum shopping, was neutral. Because diversity jurisdiction provided a basis to bring suit in federal court, US Fire did not engage in forum shopping. 

    The third factor, duplicative litigation, weighed in favor of declining jurisdiction. Additionally, adjudicating this action could potentially lead to inconsistent results, as coverage and related factual determinations here might affect the underlying proceedings. 

    Therefore, the Brillhart factors weighed in favor of declining to exercise jurisdiction. However, the court elected to stay, rather than dismiss, the case. 

    

Insured's Lack of Knowledge of Tenant's Growing Marijuana Means Coverage Afforded for Fire Loss

    The California Court of Appeals reversed the trial court's grant of summary judgment to the insurer regarding a claim for fire loss. Mosley v. Pacific Sec. Ins, Co., 2020 Cal. App LEXIS (Cal. Ct. App, May 26, 2020).

    The Mosleys rented their property to Pedro Lopez. Six months later, the property was damaged by fire. Lopez had tapped a main power line into the attic to power his energy-intensive marijuana growing operation. The illegal power line caused the fire.    

    Pacific Specialty Insurance Company (PSIC) insured the property under an HO-3 Standard Homeowners policy. Paragraph E of the policy provided,

We do not insure for loss resulting from any manufacturing, product or operation, engaged in:

1. The growing of plants; or
2. The manufacture, production, operation or processing of chemical, biological, animal or plant materials. 

    PSIC denied coverage for the loss, determining it was excluded from coverage under Paragraph E. The loss resulted from Lopez's growing marijuana. The Mosleys sued PSIC for breach of contract. The parties filed cross-motions for summary judgment. The trial court denied the Mosleys' motion, granted PSIC's motion, and entered judgment for PSIC.

    On appeal, it was undisputed that the fire that damaged the property "result[ed] from" Lopez's re-wiring the property's electrical system in order to power his marijuana growing operation. But the parties disputed whether this meant the damage "result[ed] from "the growing of plants."

    California courts broadly interpreted the term "resulting from" in a policy. The appellate court determined there was a "minimal causal connection" between Lopez's growing marijuana, the fire and the resulting loss. Therefore, the loss resulted from an operation engaged in the growing of plants, which Paragraph E excluded from coverage. 

    The Mosleys argued that, even if Paragraph E excluded the loss, the policy was void because it provided less coverage than Insurance Code section 2070 provided. Under section 2070, policies had to be at least as broad and favorable to the insured as that provided in section 2071, Section 2017 stated that an "insurer shall not be liable for loss occurring . . . while the hazard is increased by any means within the control or knowledge of the insured." The trial court found that PSIC was not liable for the loss because Lopez's marijuana growing operation, as well as the electrical alterations he made to the property increased a hazard "within the control or knowledge" of the Mosleys. 

    An insured increased a hazard "within its control" only if the insured was aware of the hazard or reasonably could have discovered it through exercising ordinary care. No authority suggested that a landlord-insured was strictly liable for a hazard created by the insured's tenant even if the insured was unaware of the hazard. 

    It was undisputed that the Mosleys did not know about Lopez's marijuana growing operation or his altering the property's electrical system. Whether Lopez's conduct was "within the control" of the Mosleys was a fact issue for the jury to decide because the record was silent as to what, if anything, the Mosleys reasonably could have done to prevent or discover Lopez's marijuana growing operation.

    To the extent PSIC's interpretation of the policy rendered the Mosleys strictly liable for Lopez's conduct, the policy was void under section 2071. By holding the Mosleys responsible for the damage Lopez caused, irrespective of the Mosleys' knowledge of his conduct or their responsibility for it, the policy subjected the Mosleys to increased liability - and less favorable coverage that was not "substantially equivalent" to coverage provided under section 2071. The trial court's order granting summary judgment to PSIC was reversed and the order denying the Mosleys' motion for summary judgment was affirmed. 

    The court's holding that the phrase "results from" requires only a minimal causal connection" may become beneficial to policy holders in COVID-19 claims. The causal connection between the coronavirus (a covered cause) and business interruption losses arguably exists. The coronavirus is the cause of the insured's physical loss or damage and the resulting business interruption loss. 

Request for Stay Denied in Dispute Over Coverage for Volcano Damage

    Although there were concurrent state and federal proceedings regarding the insureds' claims for damage caused by Kilauea Volcano, the federal district court refused to dismiss or stay the federal action. Aqulina v Certain Underwriters at Lloyd's Syndicate #2003, 2020 U.S. District Ct. LEXIS 101832 (D. Haw. June 10, 2020).

    Plaintiffs held homeowner's policies from Lloyd's that were brokered and underwritten by various defendants. Coverage from the May 2018 eruption of Kilauea Volcano was denied based upon an exclusion precluding coverage for lava-related damage. 

    Plaintiffs sued Lloyds and various brokers in federal court, alleging that defendants had engaged in a deceptive scheme to defraud plaintiffs and deprive them of meaningful coverage. Lawsuits were also filed in state court, with plaintiffs arguing their losses were covered by their policies and that defendants wrongfully relied solely on the lava exclusion to deny claims. 

    Defendant Retain Brokers, one of the brokers, moved to dismiss or in the alternative stay the federal court proceedings under the Colorado River abstention doctrine. See Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976). To utilize the abstention doctrine, Retail Brokers had to show "exceptional circumstances" under an eight part test.

    The court determined that Retain Brokers failed to show "exceptional circumstances" to suggest piecemeal litigation would be problematic if the court retained jurisdiction. The court agreed with plaintiffs that the federal and state-court actions raised different issues and that the state-court action would not answer the central questions in this case. The state action addressed allegations of coverage under the policies, while the federal case involved issues regarding the procurement of the policies. While state law controlled, the federal court was fully capable of deciding claims of unfair and deceptive acts and negligence. 

    The only facts that weighed in favor of a stay were the minor inconvenience of the federal action where the federal court was located on Oahu and defendants were located on the Big Island, the fact that plaintiffs filed both parallel actions, and the similarities between the state and federal lawsuits. On balance, these factors did not establish "exception circumstances" required for the Colorado River deference. Neither dismissal nor a stay was warranted. 

    

Coronavirus Coverage Cases - Remands, Stays, and Actual Decision from Michigan

    Early decisions are starting to appear where insurers have denied coverage for business interruption after shut downs due to the coronavirus. Most of these early decisions address procedural issues, but a trial court in Michigan recently granted the insurer's motion to dismiss a claim for business interruption due to mandated closures.

    In ABC Daycare & Learning Ctr. v. W. Bend Mut. Ins. Co., 2020 U.S. Dist. LEXIS 11491 (E.D. Ky. June 20, 2020), ABC was ordered closed on March 18, 2020, by the Kentucky Secretary for Health and Family Services (Secretary). ABC filed a claim for business interruption coverage with West Bend, which was denied. The policy provided coverage for claims arising from communicable disease-related forced shutdowns if (1) the shutdown was ordered by local, stated or federal health officials, and (2) the shutdown was due to an outbreak of a communicable disease at the insured premises. 

    ABC sued in state court, adding the Secretary as a defendant. West Bend removed to federal court, arguing the Secretary was a nominal defendant. ABC sought remand. West Bend argued that the case solely concerned its alleged failure to pay the business interruption claim and the interpretation of the Secretary's order was only at issue to the extent it related to the enforcement of the policy. ABC contended the Secretary was an indispensable party because his authority to order all daycares to close would be challenged by West Bend, and the overall scope and interpretation of the order was central to the case. 

    The court agreed with ABC and ordered the case remanded to state court. ABC likely could not maintain a successful communicable disease-related business interruption claim unless a valid government order caused ABC to close.

    In the second recent case, the insured sought a stay of the suit seeking coverage for its business interruption losses due to COVID-19. After filing suit, a group of plaintiffs nationwide filed before the Judicial Panel on Multidistrict Litigation (JPML) seeking to consolidate actions filed against insurers for COVID-19 related losses. The Panel was scheduled to hear motions whether to consolidate the cases on July 30, 2020. The insured sought a stay until after a decision was made by the JPML. Meanwhile, the insurer had filed a motion to dismiss. On balance, the court found that a stay pending a decision by the JPML was warranted.

    There is no published written decision from the Michigan trial court's decision to dismiss the insured's business interruption claim, but it is available on You Tube. [here] In Gavrilides Management Company vs. Michigan Insurance Company, the complaint did not alleged direct physical loss of or damage to the property. The property still stood without any physical alteration. There was no allegation that coronavirus had entered the premise through either an employee or patron. Instead, the plaintiff alleged that the government closure orders caused the loss. The pleading did not establish coverage as a matter of law and the case was dismissed. 

COVID-19 Claim for Business Interruption Remanded to State Court

    Acknowledging there was not yet a body of case law developed by the state court, the federal district court remanded the claim. Dianoia's Eatery, LLC v. Motorists Mutual Ins. Co., Civil Action No. 20-706 (W.D. Pa. May 19, 2020).

    Dianoia's filed a complaint in state court against Motorists Mutual seeking a declaratory judgment for coverage for business interruption losses due to COVID-19 shut down orders. Motorists Mutual removed to federal district court. 

    The court remanded the case to state court for lack of subject matter jurisdiction by diversity. Alternatively, the court declined to exercise subject matter jurisdiction over the case under the Declaratory Judgment Act. 

    In diversity jurisdiction, Motorists Mutual had the burden to show complete diversity. Since plaintiff was a limited liability company, Motorists Mutual had to conduct a reasonable investigation to determine the citizenship of the LLC's members and at least aver that none of its members shared Motorists Mutual's Ohio citizenship. This was not performed by Motorists Mutual.

    Even if the court had diversity jurisdiction, it would decline to exercise its jurisdiction pursuant to the discretionary authority under the Declaratory Judgment Act. Where the state law was was uncertain or undetermined, the federal court should be reluctant to exercise its jurisdiction under the Declaratory Judgment Act. 

    Plaintiff's complaint raised novel coverage issues under Pennsylvania law which were best reserved for the state court to resolve in the first instance. Therefore, the case was remanded to the state court. 

 

Duty to Defend Breached Under Employment Practices Policy

    Finding the exclusion relied upon by the insurer was ambiguous, the Fourth Circuit affirmed the district court's ruling that a duty to defend was owed. Mariam, Inc. v. Universal Underwriters Ins. Co., 2020 U.S. App. LEXIS 15658 (4th Cir. May 15, 2020)

    Tamara Darvish Fallahi sued her father, his company, and her two half-brothers (Appellees) in a dispute over a family-owned business. The allegations included claims of tortious interference with economic relationships and tortious interference with contract. To prevail on her underlying tort claims, Fallahi had to show intentional, malicious acts that were calculated to cause harm. 

    Appellees tendered to Universal Underwriters, who's policy provided coverage for allegations of wrongful employment practices. Universal denied the claim, citing an exclusion for coverage of actions taken with the intent to cause harm. The exclusion did not apply, however, if the injury arose solely from the intentional use of reasonable force for the purpose of protecting persons. The district court granted summary judgment to Appellees on their duty to defend claim.

    On appeal, Universal argued that "harm" meant any harm whatsoever, while Appellees maintained that, reading context, "harm" could refer only to physical harm. The Fourth Circuit agreed with Appellees. The exclusion was ambiguous because it could suggest more than one meaning to a reasonably prudent layperson. "Harm" could reasonably be interpretedas referring only to harms of a physical nature. In light of the ambiguity, the exclusion was construed against Universal as the drafter of the policy. The district court's judgment was affirmed. 

No Coverage for Counterclaim Arising from Insured's Faulty Workmanship

    The Eighth Circuit found there was no coverage for the insured's faulty workmanship. Am. Family Mut. Ins. Co., S.I. v. Mid-American Grain Distributors, LLC, 958 F.3d 748 (8th Cir. 2020).

    Mid-American contracted with Lehenbauer to design and construct a grain storage and distribution facility for Lehenbauer. Before the work was competed, Lehenbauer terminated Mid-American's services. Mid-American then sued Lehenbauer for breach of contract. Lehenbauer counterclaimed against Mid-American, alleged breach of "implied duties of workmanlike performance and fitness for a particular purpose" and negligence. Mid-American tendered the counterclaim to American Family. American Family accepted the tender under a reservation of rights, but sued Mid-American for a declaratory judgment.

    The district court granted American Family's motion for summary judgment, concluding that the counterclaims did not allege an occurrence. 

    On appeal, the Eighth Circuit noted that under Missouri law, an "accident" did not include acts that resulted in expected or foreseeable damage. But must the accident be foreseeable to the actual insured, subjectively speaking, or to a reasonable insured, objectively speaking? Here, foreseeability could be inferred as a matter of law given the nature of the act and they type of damages at issue even under the subjective standard.

    The damages in question were the inherent results of shoddy workmanship. Therefore, Mid-American's alleged defective construction work was not an "occurrence." Lehenbauer's damages were the normal, expected consequence of Mid-American's work. They were foreseeable as a matter of law, so Mid-American's work was not an "accident," and thus not an "occurrence." The district court decision was affirmed. 

No Coverage For Wind And Flood Damage Suffered From Superstorm Sandy

    The court found that the policy's anti-sequential clause barred coverage for damage caused by Hurricane Sandy. Estate of Doerfler v. Fed. Ins. Co., 2020 N.J. Sup. Unpub. LEXIS 920 (May 14, 2020).

    The insureds held identical homeowners policies from Chubb and Federal Insurance Company. Damage resulting from flood was not covered. The policies' "surface water exclusion" stated,

[W]e do not cover any loss caused by: flood, surface water, waves, tidal water, overflow of water from a body of water . . . or spray from any of these even if driven by wind.

The insureds also had separate flood insurance policies, insuring the structure of each home for $250,000.

    Superstorm Sandy created wind gusts as high as eighty miles per hour. A severe storm surge caused tides to rise between nine and eleven feet. The storm surge caused surface water to flood onto plaintiffs' properties and their homes ultimately collapsed. 

    Claims were submitted to the insurers. Inspectors determined that the damage to the homes was cased by storm surge and flood waters, not wind. Plaintiffs were paid the maximum amounts under the flood policies. 

    Plaintiffs sued the insurers and cross-motions for summary judgment were filed on whether the surface water exclusion barred coverage after the homes were destroyed in the flood that inundated their properties. 

    The trial judge correctly found that the policies did not cover the losses sustained in the flood. The surface water exclusion clearly applied. 

    The trial judge correctly rejected plaintiffs' contention that wind was the initiating and efficient proximate cause of the storm surge and, because wind damage was covered under their policies, the surface water exclusions did not apply. Under the efficient proximate cause rule, recovery was allowed where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk.

    As determined by the trial judge, the efficient proximate cause rule did not apply here. Wind and flood waters were not separate events. Further, there were no sequential causes of loss. Because the policies excluded any loss contributed to, made worse by, or in any way resulting from or caused by flood, surface water, waves, tidal water, or overflow from a body of water (an anti-sequential clause), the claims were barred regardless of whether wind played any role in the loss. 

    Accordingly, the trial court properly granted summary judgment to the insurers.

Earth Movement Exclusion Precludes Coverage

    The Federal District Court, District of Hawaii, found the earth movement exclusion barred coverage for the contractor when a landslide damaged the property. North River Ins. Co. v. H.K. Constr. Corp., 2020 U.S. Dist. LEXIS 90110 (D. Haw. May 22, 2020). 

    Bruce and Yulin Bingle sued HK for damage caused to the Bingle property. HK was hired as the contractor for the construction of a new residence and improvements on their property in Kaneohe. HK excavated near the boundary of the neighbors' and the Bingle's property in order to cut the existing slope to build a retaining wall. Due to the excavation work, the slope on the Bingle property failed and soil eroded away. At the time, the Bingles were selling their property. Due to the landslide, the buyer decided not to buy the property.

    The Department of Planning and Permitting issued a Notice of Violation for failure to obtain a grading permit. HK notified its carrier, North River. North River agreed to defend under a reservation of rights, but then filed suit against HK for a declaratory judgment. 

    The policy excluded coverage for property damage caused by "subsidence and earth movement." Further, "such loss or damage is excluded regardless of any other cause or event, including any product, work or operation provided or performed by or on behalf of the insured, that contributes concurrently or in any sequence to the loss or damage."

    HK conceded that its work was the sole cause of the loss, but argued the exclusion only applied to earth movements caused entirely by natural phenomena, not those caused by human action. The court disagreed. The exclusion was unambiguous. It did not cover property damage resulting from movement, "settling, slipping, or falling away" of and caused by natural phenomena, HK's operations, or any combination thereof. 

    Although there was no Hawaii law construing the earth movement exclusion, authority from other jurisdictions interpreting a similar or identical exclusion held that the provision unambiguously excluded earth movement-related damages caused by natural phenomena and the insured's activities. Therefore, North River had no duty to defend. 

Title Insurer Breaches Duty to Defend in Bad Faith

    The Washington Supreme Court found that a title insurer breached its duty to defend when it was discovered that a Native American tribe had rights to access the land under a treaty with the State of Washington. Robbins v. Mason County Title Insurance Co., 2020 Wash. LEXIS 288 (Wash. May 7, 2020).

    In 1854, the Washington Territory and the Squaxin Island Tribe entered the Treaty of Medicine Creek. The tribe relinquished its rights to the land but retained "the right of taking fish at all usual and accustomed grounds and stations . . ., in common with all citizens of the Territory."

    In 1978, the Robbins purchased property in Mason County that included tideland with manila clam beds. When purchasing the property, Robbins obtained title insurance from Mason County Title Insurance Company (Mason). Under the policy, Mason agreed to insure Robbins "against loss or damage sustained by reason of: . .  . [a]ny defect in, or lien or encumbrance on, said title existing at the date hereof." Further, Mason agreed to defend the insured against any demands and legal proceedings founded upon a claim of title, encumbrance or defect which existed prior to the date the policy was issued. The policy's exceptions included, "public or private easements not disclosed by the public records." 

    For years Robbins had contracted with commercial shellfish harvesters to enter the property to harvest shellfish from the tidelands. In 2015, the Tribe wrote the Robbins to notify them of the Tribe's plan to enter the property and harvest shellfish in accordance with treaty rights.

    Robbins tendered the claim to Mason. The claim was denied based on Mason's view that the Tribe's asserted right was an "easement" and a treaty was not a record that imparts constructive notice. 

    Robbins sued Mason for breach of its duty to defend. The trial court granted Mason's motion for summary judgment. The Court of Appeals reversed, holding that the Tribe's letter was a "demand" under the policy that triggered the duty to defend, the Tribe's asserted right was a profit, and that a profit was not an easement. The Court of Appeals also found that Mason's denial of a defense was an act of bad faith.

    On appeal, the Washington Supreme Court first found the Tribe's letter as a "demand." The Tribe asserted its legal right to harvest shellfish on Robbins' tidelands by sending Robbins a letter stating that the Tribe was seeking the shellfish it was due. The plain meaning of the policy supported concluding that the letter was a demand. The policy required Mason to defend "demands." Therefore, Mason was required to defend unless an exception applied.

    If the Tribe's asserted right was either not an easement or was disclosed by public records, then the policy exception did not apply and Mason had a duty to defend. The court determined that the Tribe's right was a profit, which was defined as "the right to sever and to remove some substance from the land." Various authorities disagreed on whether a profit was a type of easement. The uncertainty had to be construed in favor of the insured. Mason therefore breached its duty to defend against the Tribe's demand.

    Mason was also in bad faith. The law regarding whether the Tribe's asserted right was an easement or a profit and whether a profit was an easement was unclear under Washington law. 

    Robbins, however, did not seek summary judgment on Mason's affirmative defenses and the trial court had not ruled on any of Mason's defenses. Therefore, the case was remanded to the trial court for consideration of the defenses, consistent with the other holdings in the opinion.