Insurance Law Hawaii

Hawaii Federal District Court Remands Coverage Dispute

    Accepting the insured's amended complaint, the federal district court of Hawaii remanded the coverage action to state court. Hale v. Lloyd's, London, 2020 U.S. Dist. LEXIS 9061 (D. Haw. Jan. 17, 2020). 

    Hale purchased a policy for his home in Hilo, Hawaii, from Defendant Pyramid Insurance Centre. The policy was memorialized by a Lloyd's Certificate issued by Defendant Lloyd's. On September 19, 2017, Hale entered Chapter 7 Bankruptcy. Included in the bankruptcy proceeding was Hale's home and a secured home mortgage loan now owned by Defendant Specialized Loan Servicing, LLC. The Bankruptcy Court issued a discharge order on January 18, 2018. 

    On May 9, 2018, Hale's home was destroyed, being covered with lava from the Kilauea volcano eruption. Hale filed a claim with Lloyd's based upon the loss of his home. The claim was denied. Subsequently, however, Lloyd's issued a check for the full amount of the policy. Both Hale and Specialized Loan were listed as payees on the check. 

    Hale sued in state court for unfair and deceptive business practices and breach of the covenant of good faith and fair dealing. The complaint also alleged actions of the defendants violated the Bankruptcy Code. Specialized Loan removed the case to federal court. Hale filed a Motion to Remand the case back to state court. Attached to the Motion to Remand was a proposed Amended Complaint removing all references to federal law. At the hearing on Hale's Motion to Remand, Hale's counsel made an oral Motion to Amend his Complaint, as proposed in the attachment to his Motion to Remand.

    In her decision, Judge Gillmor first granted the Motion to Amend. Lloyd's argued that Hale's five-month delay in  moving to amend caused prejudice through increased litigation expenses. Litigation expenses incurred before a motion to amend was filed did not establish prejudice, however. In the absence of prejudice, there was a strong presumption in favor of granting leave to amend. The court also found there was no bad faith or futility in seeing to amend. Therefore, Hale was granted leave to file the proposed Amended Complaint 

    The court next considered whether the case should be remanded to state court. The original complaint alleged that defendants had violated the Bankruptcy Code. At the time of removal, the bankruptcy claims gave the federal court original federal question jurisdiction. The proposed Amended Complaint removed all reference to Hale's federal claims and his underlying bankruptcy. Instead, the remaining claims were exclusively state law claims of unfair and deceptive business practices and breach of the implied covenant of good faith and fair dealing.

    Therefore, the court no longer had original federal question jurisdiction. The court declined to exercise its discretionary supplemental jurisdiction over the case. The case was remanded to the state court. 

    

Industry Groups Seek Legislation to Reject Application of Restatement of Law, Liability Insurance

    The Florida Record reports that an insurance association has urged the Florida legislature to not recognize the recently issued Restatement of the Law, Liability Insurance (RLLI). The post is here.   

    The American Law Institute (ALI) authored the RLLI, published in 2019. The ALI is a leading independent organization in the United States producing scholarly work to "clarify, modernize and otherwise improve the law." Over the years, it has published Restatements of the Law, Model Codes, and Principles of the Law. Many of its works are influential in the courts and legislatures. Hawaii appellate courts rely on various Restatements where there is no existing law or recognized common law on a particular issue. E.g., Del Monte Fresh Produce, Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357, 364 (Haw. 2007). 

    The RLLI has been labeled as a controversial project that in many instances takes the approach of proposing innovation and reform in liability insurance law, rather than restating existing common law insurance rules. Nevertheless, it is now being cited by some courts and many litigants in cases across the country. 

    Some legislatures have enacted statutes and resolutions rejecting the RLLI as inconsistent with the law and policy of their jurisdictions. The American Property Casualty Insurance Association (APCIA) has urged such legislation in Florida, contending that the RLLI conflicts with Florida law. APCIA contends that the RLLI represents a significant shift from the ALI's traditional role of dependably restating existing law. Instead, the new Restatement attempts to make a case for what insurance law should be, despite the recognized authority of courts, regulations and lawmakers to be the ultimate decision makers of these issues.

    Other state legislatures, such as in Ohio, have passed resolutions rejecting the RLLI as representing the state law. 

 

    

Phishing Scheme Creates Direct Physical Loss Under Crime Policy

    The Eleventh Circuit agreed that a sophisticated phishing scheme that persuaded an employee to wire money to a foreign bank account was a direct physical loss covered under a commercial crime policy. Principle Solutions Group, LLC v. Ironshore Indemn., Inc.,2019 U.S. App. LEXIS 36350 (11th Cir. Dec, 9, 2019).

    At 9:10 a.m., Principle's controller, Loann Lien, received an email purporting to be from Josh Nazarian, a managing director of Principle. The email informed Lien that Principle had been secretly working on a key acquisition and asked her to wire money as agreed to as soon as possible. Lien was instructed to give her full attention to attorney Mark Leach, who would provide further information.

    Lien received an email five minutes later from some one purporting to be Leach, an attorney at a London firm. Leach sent Lien remittance details for a bank in China. Leach reiterated to Lien over the phone that Nazarian approved the wire transfer.   

    Lien inform Wesleyans Fargo, a fraud prevention service, who asked for verification that the wire transfer was legitimate. Lien confirmed with Leach that Nazarian had approved the transaction. Lien relayed this information to Wells Fargo, which released the hold. At 11:21 a.m., about two hours after Lien received the first email, Principle wired more than $1.7 million to the scammers.

    Lien discovered that the request was fraudulent a day later when she spoke with Nazarian, who told her that he was not in the office that day. Nazarian promptly called Wells Fargo to report the fraud, but neither Principle nor law enforcement could recover the funds.

    Principle sought coverage for the loss under its policy with Ironshore. The policy covered "loss resulting directly from a fraudulent instruction directing a financial institution to debit [Principle's] transfer account and transfer money from that account." Ironshore denied coverage, asserting that Nazarian's purported email did not "direct a financial institution to debit [Principle's] transfer account" because it only told Lien to await instructions from Leach. Ironshore further argued that the asserted loss did not "result directly from" a fraudulent instruction because Leach conveyed necessary details to Lien after the initial email and Wells Fargo held the transaction, both of which were intervening events between the instruction and the loss. 

    Principle sued and cross motions for summary judgment were filed. The district court found the policy provision was ambiguous and granted summary judgment to Principle.

    The Eleventh Circuit affirmed. The email purporting to be from Nazarian, which informed Lien of the need to wire money and told her to await further instructions from Leach, qualified as a fraudulent instruction. Ironshore argued the email did not "direct" Principle to pay money out of its accounts, as the policy required. But the court found the email directed "a financial institution to debit [Principle's] transfer account and transfer money from that account." 

    Ironshore argued that the email was not a "fraudulent instruction" under the policy because someone purporting to be an outside attorney, not a principle employee, sent it. Again, the court disagreed. Nothing in the policy language warranted the assumption that the two emails could not be part of the same fraudulent instruction. Reading the two emails together left no doubt that they were part of the same fraudulent instruction.

    Ironshore next contended that Principle's losses did not "result directly from" a fraudulent instruction as the policy required. Because the loss depended on Lien's conversations with Leach and Wells Fargo, which occurred after Nazarian's purported email to Lien to wire money, Ironshore concluded that no immediate link existed between the instruction and the loss. The court noted that reading the phrase "resulting directly from" as a whole required the court to define "directly" within the context of causation. And in that context, "directly" meant proximately. The ordinary meaning of "resulting directly from" required the court to determine whether the fraudulent instruction proximately caused Principle's loss.

    Ironshore contended that Lien's communications with Leach and Wells Fargo involvement severed the causal chain. But these events that intervened between Nazarian's purported email and Principle's loss were foreseeable consequences of the email. Therefore, the loss "resulted directly from" the purported email and the policy covered the loss. 

With Certified Question Answered, Ninth Circuit Finds Insurer Bound by Agent's Certificate of Insurance

    The Ninth Circuit, relying upon the Washington Supreme Court's response to a certified question (prior post here] found that the insurer was bound by the agent's certificate of insurance identifying an additional insured. T-Mobile USA Inc. v. Selective Ins. Co of Am., 787 Fed. Appx. 395 (9th Cir. Dec. 9, 2019). 

    Selective issued a policy to a contractor of T-Mobile Northeast, LLC (T-Mobile NE), a wholly owned subsidiary of T-Mobile USA. The policy included an Additional Insured Endorsement that extended "additional insured" status to any entity which whom the contractor entered a written contract that required the contractor to add that entity as an additional insured under the policy. The endorsement extended coverage to T-Mobile NE but not T-Mobile USA. In 2012, the Vany Dyk Group, Inc. - Selective's authorized agent acting with apparent authority - issued a certificate of insurance (COI) to T-Mobile USA. The COI stated that T-Mobile USA "is included was an additional insured even though it also expressly stated that the COI could not extend or alter the coverage afforded by the policy.

    Under Washington law, an insurer was bound by all acts, contracts, or representations of its agent which were within the scope of the agent's real or apparent authority. But the purpose of a COI was to inform the recipient that insurance had been obtained. Under Washington law, a COI was not the functional equivalent of an insurance policy, and it therefore could not be used to amend, extend, or alter the coverage provisions of a policy. 

    The Ninth Circuit, therefore, certified a question to the Washington Supreme Court, asking whether an insurer bound by representations made by its agent in a COI with respect to a party's status as an additional insured when the certificate included language disclaiming its authority and ability to expand coverage. The Washington Supreme Court responded, "The answer is yes: an insurer is bound by the representation of its agent in those circumstances. Otherwise, an insurance company/s representations would be meaningless and it cold mislead without consequence." 

    Given this response, the Ninth Circuit reversed the district court's orders granting summary judgment and dismissal on the grounds that Selective was bound by the agent's representations that T-Mobiie USA was not an additional insured under the policy. 

New Jersey Legislation Would Bar Anti-Concurrent Causation Clause in Homeowners' Policies

    A bill prohibiting the use of anti-concurrent causation clauses in homeowners' insurance policies has been introduced before the New Jersey legislature. The bill is here. 

    Under an anti-concurrent causation clause, the policy bars coverage if two perils (i.e., wind and water damage) contribute to a loss and one peril is excluded from coverage. For example, wind damage alone may be covered, while water damage is excluded. If both wind and water contribute to the loss, regardless of the degree to which each peril contributes, the anti-concurrent causation clause would bar coverage.

    New Jersey S 217 states,

An insurer authorized to transact the business of homeowners insurance in this state shall not exclude coverage in a homeowners insurance policy for loss or damage caused by a peril insured against under the terms of the policy on the grounds that the loss or damage occurred concurrently or in any sequence with a peril not insured against under the terms of the policy. Any such provision to exclude coverage shall be void and unenforceable.

    There is no similar legislation in Hawaii and carriers frequently utilize anti-concurrent causation clauses in homeowners' policies. 

    We will track the status of the bill as it works its way through the New Jersey legislature. 

Vermont Supreme Court Reverses, Finding No Coverage for Collapse

    The Vermont Supreme Court reversed the trial court's decision for collapse coverage. Commercial Constr. Endeavors, Inc. v. Ohio Sec. Ins. Co., 2019 Vt. LEXIS 173 (Vt. Sup. Ct. Dec. 13,2019).

    Commercial Construction Endeavors, Inc. (CCE) built a livestock barn. By late December 2014, the barn was partially complete, with the foundation laid, wood framing erected, and roof trusses installed. In late December, strong winds caused the structure to collapse. CCE started clearing debris and rebuilding the barn, incurring additional labor and material costs.

    CCE reported the collapse to Ohio Security. The policy covered loss to "Covered Property." Ohio Security determined that the loss was covered for "Off-Premises Property Damage Including Care, Custody or Control." This endorsement provided coverage for damage to real property upon which CCE was performing operations where the damage resulted from those operations. Ohio Security paid CCE $24,750, the full amount available under the endorsement, less a $250 deductible.

    CCE asserted that coverage was also available under the "Property Floater Coverage Form." The floater provided additional coverage for collapse, including loss caused by:

a. Windstorm . . . as covered in this Coverage Form

. . . 

f. Use of defective materials or methods in construction . . . if the collapse occurs during the course of the construction. . .

Ohio Security determined there was no coverage under the floater, advising that "the poClicy does not provide coverage for materials after they have been installed into the building project under the Property Floater Coverage." CCE sued Ohio Security for breach of contract, contending additional coverage was due. 

    The trial court found the barn was real property, not business personal property, but denied Ohio Security's summary judgment motion because the policy was ambiguous. The court, however, did grant summary judgment to Ohio Security on the debris removal coverage.

    The Supreme Court considered whether the use of the term "Covered Property" in some portions of the floater - but not in the additional collapse coverage subsection - created an ambiguity, requiring the conclusion that additional collapse coverage was not limited to "Covered Property," i.e., business personal property. There was no dispute that "covered Property," as defined in the floater, was limited to business personal property. Nor was there a dispute that the collapsed barn was not business personal property. 

    Because elsewhere in the policy it stated that Ohio Security would pay only for "loss to Covered Property," the collapse coverage section was unambiguous. The only reasonable interpretation of the floater was that the limitation expressed as to "Covered Property" applied equally to all subsections, including the Additional Coverage-Collapse section. The additional collapse coverage applied only to "Covered Property," which was business personal property. CCE did not dispute that the barn was not business personal property and thus was not "Covered Property." Therefore, the court's summary judgment ruling was reversed. 

    Further the debris removal was also not a loss involving business personal property. Therefore, it was not a loss to "Covered Property." The lower court's ruling that there was no coverage for debris removal was affirmed. 

Insurer Entitled to Reimbursement of Defense Costs Under Unjust Enrichment Theory

    The federal district court for the district of Hawaii determined that the insurer could recover defense costs from an additional insured consistent with its Reservation of Rights letter under an unjust enrichment theory. Giga, Inc. v. Kiewit Infrastructure W. Co., 2020 U.S. Dist. LEXIS 10151 (D. Haw. Jan. 22, 2020).

    This case was related fall-out from the Arthur case. Arthur v. Dept. of Hawaiian Homelands, 185 Haw. 149 (Haw. Ct. App. 2015). A prior post on the case is here. 

    In Arthur, a resident, Mona Arthur, of the Kalawahine Streamside Housing Development, was killed when she apparently slipped and fell from a hillside adjacent to the project. She was on the hillside tending to her garden there. At the bottom of the hill was a two foot fence in front of a drainage ditch, where Mona allegedly hit her head.

   Mona's husband, William Arthur, sued a variety of defendants including the land owner, designer, developer, civil engineer and others. William alleged the defendants were negligent in the design, construction and supervision of the construction of the hillside area. 

    The developer hired Kiewit as general contractor for grading and site work. Kiewit subcontracted with Pacific Fence to construct a debris fence between the homes and the adjacent hillside. Among the many indemnity provisions between the various parties, Pacific Fence agreed to indemnify Kiewit "to the fullest extend permitted by law."

    Island Insurance was Pacific Fence's CGL carrier and issued a certificate of insurance to Pacific Fence for work on the hillside. The certificate included Kiewit as an additional insured. 

    When sued under a third party complaint related the the death of Mona Arthur, Kiewit filed a fourth party complaint against Pacific Fence, asserting a claim for contribution because Kiewit was entitled to an immediate defense and full indemnification from Pacific Fence. 

    Island Insurance accepted on behalf of (Pacific Fence) Kiewit's tender of defense to the Arthur complaint, subject to a detailed reservation of rights. Among the rights reserved was the right to seek reimbursement from Kiewit of attorneys fees and other costs if it was determined that Pacific Fence was not obligated to defend Kiewit under the subcontract.

    The Island Insurance letter made clear that Kiewit was an "additional insured" under the policy, but the Kiewit/Pacific Fence subcontract appeared to be an "insured contract" of Pacific Fence. Therefore, Island would indemnify Pacific Fence for its liability to Kiewit under the subcontract's indemnity clause, to the extent Pacific Fence's liability to Kiewit was based upon "bodily injury" caused by an "occurrence" during the policy period and not subject to any exclusion.

    In Arthur II, the Hawaii Supreme Court concluded that any duty to defend based on an indemnitor's own potential wrongdoing(i.e., not based on an indemnitee's "sole negligence or willful misconduct") was not determined at the outset of the underlying litigation as in an insurance coverage case. The complaint allegation rule did not apply because the court had determined that Haw. Rev. Stat. sec. 431:10-222 prohibited a promisor in a construction contract from being contractually required to defend a promisee against liability caused by the promisee. Haw. Rev. Stats. sec. 431:10-222 established than an indemnity provision seeking to indemnify against liability for bodily injury caused by the sole negligence of the promisee was invalid as against public policy. Therefore, with respect to a construction contract, the scope of a promisor's duty to defend was determined at the end of the litigation. Arthur II determined that the Kiewit/Pacific Fence subcontract's indemnity clause was void and violated the statute to the extent it required an immediate defense of potentially non-covered claims. Island should not have been defending Kiewit. 

    After the Arthur case settled, Island filed this declaratory relief action against Kiewit, seeking declaratory relief and reimbursement of costs incurred in defending Kiewit in the Arthur litigation. Island filed a motion for partial summary judgment, arguing that it did not owe a duty to defend Kiewit, and was entitled to enforce Island's reservation of rights letter. It was established at the end of the Arthur litigation that Pacific Fence had no duty to defend and was not responsible for any defense costs to Kiewit. Island was therefore entitled to a declaratory judgment as a matter of law. The reservation of rights letter was clear. Island reserved the right to stop paying for Kiewit's defense if it was determined that there was no potential for Pacific Fence to have to indemnify Kiewit under the subcontract. 

    The decision was not based upon insurance law. Therefore, the court did not reach - and offered no opinion regarding - the unresolved question of Hawaii law whether an insurance company defending an insured under a reservation of rights would be entitled to seek reimbursement of defense costs. Instead, the court relied on a quasi-contract theory of unjust enrichment to allow Island Insurance to enforce its reservation of rights letter. Island was entitled to reimbursement. 

    

 

 

 

 

Hawaii Legislature Considers Bill to Regulate Public Adjusters

    HB No. 2320, a revision to the Hawaii Insurance Code to regulate public adjusters, has been introduced before the Hawaii Legislature. The bill is here. 

    The bill would require a public adjuster to enter a written contract for services which would, among other things, describe the loss and its location, describe the services to be provided to the insured, attest that the public adjuster is fully bonded, disclose the full compensation the public adjuster is to receive, and state that initial expenses to be reimbursed to the public adjuster from any claim payment.

    Public adjusters would not be entitled to a fee of more than eight per cent of any recovery from the insurance company. If the insurer paid policy limits within seventy-two hours after a claim was submitted or committed in writing that payment would be made for the policy limits, the public adjuster would not receive a commission based upon a percentage of the total recovery from the insurer. Instead, the public adjuster would only be entitled to reasonable compensation from the insured for services provided. 

    The public adjuster would be required to provide to the insured with a written disclosure concerning any financial interest that the public adjuster might have with other parties involved in any aspect of the claim, including any construction firm or building appraisal firm that is to receive any compensation for assisting with the claim.

    The bill would give the insured the right to rescind the contract within three business days after the date of signing the contract.

    Finally, compensation provisions in a public adjusting contract would be made available to the commissioner upon request.  

    The first hearing on the bill will be Thursday, January 30, 2020 at 2:30 p.m.

2020 ICLC Conference Upcoming

    The 32nd annual ABA Insurance Coverage Litigation Committee CLE seminar is rapidly approaching. The conference will be held in the foothills above Tucson from March 4-7, 2020. The brochure with details and the full seminar schedule is here. 

    As always, this is a don't miss event for insurance practitioners, including lawyers, judges,and those working in the industry. Seminar topics will include the new Restatement of the Law of Liability Insurance, coverage arguments in mediation, indemnification and insurance clauses, important insurance decisions of 2019, and much more. I will join a panel discussing Procedural Bad Faith - The Latest Trends, which which will include a discussion on the recently issued Adams v. Hawaii  Medical Service Association, 450 P. 3d 780 (Haw. Sept. 30, 2019). 

    Please join us. Early bird registration ends February 5, 2020. 

    

Coverage Case Remanded For Failure to Meet Amount in Controversy Requirement

    The district court granted the motion to remand due to lack of subject matter jurisdiction because the insurer did not sufficiently establish that the amount in controversy was above $75,000. Caceres v. Scottsdale Inc. Co., 2019 U.S. Dist. LEXIS 209688 (S.D. Fla. Dec. 5, 2019).

    Hurricane Irma damaged plaintiffs' home. They notified Scottsdale, their insurer under their 2017 policy. Scottsdale issued a check for $10,975.00, after taking out the wind deductible of $5,853.68. Under the renewed 2019 policy. plaintiffs reported property damage to Scottsdale due to heavy rain and a roof collapse. Scottsdale issued a check for %7,975.04. 

    Plaintiffs then presented to Scottsdale a repair estimate for $91,862.51. The estimate listed September 10, 2017 as the date of loss, but also listed the claim submitted in 2019. The repair estimate covered the estimated damages for both claims.

    Plaintiffs then sued in state court for damages in excess of $15,000. Scottsdale removed the case to federal district court, alleging the amount in controversy was $75,033.83, based on the $91,862.51 repair estimate minus the $10,975 paid for the 2017 claim and the $5,853.68 wind deductible. Plaintiffs sought remand arguing: (1) Scottsdale could not use a pre-suit damage estimate as a basis for establishing the amount in controversy; and (2) even using the pre-suit damage estimate, Scottsdale failed to account for the second check paid to Plaintiffs, which would decrease the amount in controversy from $75,033,83 to $67,058.79. 

    The court first determined that a pre-suit estimate of repairs could be used to determine whether the suit had been properly removed. It was undisputed that Plaintiffs' total estimate of damages for both claims was $91,862.51. But the parties disagreed as to which check amounts should be subtracted from the $91,862.51 in determining the applicable amount in controversy. The court determined that the amount in controversy, which was based upon the combined $91,862.51 damage estimate, had to account for all payment and deductibles applied in connection with the 2017 and 2019 claims. Thus, the amount in controversy was $67,058.79.  

    Scottsdale also added Plaintiffs' anticipated attorneys' fees to establish the amount in controversy. The amount in controversy did not include highly speculative, prospective amounts of attorney's fees, but rather included only those fees accrued as of the time of removal. Further, Scottsdale presented no evidence to establish that Plaintiffs had accrued $7,941.21 in attorneys' fees as of the time of removal. Therefore, the court concluded it did not have subject-matter jurisdiction over the case.