Insurance Law Hawaii

Court Affirms Denial of Cross-Motions for Summary Judgment in Cyber Claim

    The appellate court found that cross-motions for summary judgment filed by the insured and insurer for a claim arising from computer fraud were properly denied. G&G Oil Co. of Ind. v. Cont'l W. Ins. Co., 2021 Ind. LEXIS 182 (Ind. March 18, 2021). 

    G&G Oil discovered one morning it was locked out of its computer system. Its hard drives were encrypted, and one screen prompted: "To decrypt contact [email user]. Enter password." In order to decrypt the contents of its own drives, G&G Oil believed it would have to contact the person or entity responsible for the attack to regain access.

    G&G Oil consulted with the FBI and other experts before initiating contact with the hackers to negotiate the release of its servers. G&G Oil ultimately paid nearly $35,000 before regaining access to its computer systems. A claim was then submitted under its policy with Continental. The claim was denied becuase the computer hacking was excluded from the policy. Continental contended that the payment was voluntarily transferred by G&G Oil to the hacker and therefore, the hacker did not "transfer funds directly" from G&G Oil. 

    G&G Oil filed suit. The policy covered loss "resulting directly from the use of any computer to fraudulently cause a transfer of money." On cross-motions for summary judgment, the trial court found that the loss was not "fraudulently caused" but was the result of theft. Second, G&G Oil's payment to the hacker did ot qualify as a loss "resulting directly from the use of a computer" under the policy and instead was a voluntary payment ot accomplish a necessary result. Summary judgment was granted to Continental. The Court of Appeals affirmed. 

    The Supreme Court found that the term "fraudulently cause a transfer" could be reasonably understood as simply to obtain by trick. Nevertheless, G&G Oil had not designated reliable evidence to entitle it to summary judgment. Not every ransomeware attach was necessarily fraudulent. For example, if no safeguards were put in place, it was possible a hacker could enter a company's servers unhindered and hold them hostage. There would be no trick involved. 

    Nor was summary judgment appropriate for Continental. There was a question as to whether G&G Oil's computer systems were obtained by trick. Though little was known about the hack's initiating event, enough was known to raise a reasonable inference the system could have been obtained by trick. 

    The court also considered whether the loss "resulted directly from the use of a computer." G&G Oil said it was because a computer was part of the entire scheme. Continental argued, and the trial court agreed, that G&G Oil's voluntary transfer of payment was an intervening cause that severed the causal chain of events.

    The court determined that G&G Oil's loss resulted either immediately or proximately without significant deviation from the use of a computer. The payment was nearly the immediate result from the use of a computer. Though the transfer of money was voluntary, it was made only after consulting with the FBI and other experts. The payments were "voluntary" only in the sense G&G Oil consciously made the payment. The "voluntary" payment was not so remote that it broke the causal chain. Therefore, G&G Oil's loss "resulted directly form the use of a computer."

Insurer's Motion to Dismiss Class Action COVID-19 Claim Denied

    The insurer's motion to dismiss a nationwide class action suit arising from shutdown orders after the COVID-19 pandemic was rejected by the court. Back2health Chiropractic Ctr. v. Sentinel Ins. Co., 2021 U.S. Dist. LEXIS 42791 (D. N.J. March 15, 2021). 

    Back2health sought coverage under its all-risk policy after stay-at-home and business restrictions were implemented. The complaint alleged the policy covered some of Back2health's financial losses. The insurer denied the claim due to lack of physical damage to Back2health's property. Back2health filed suit individually and on behalf of a nationwide class consisting of policy holders who's coverage had been denied by Sentinel.

    Sentinel first moved to dismiss due to lack of personal jurisdiction under Rule 12 (b) (2), Fed. R. Civ. P. Sentinel argued there was no specific jurisdiction for claims of nonresident class members with no adequate link to New Jersey. The court rejected this argument because, at this early stage of the litigation, it needed to only be satisfied that it had personal jurisdiction over Sentinel for the claims advanced by Back2health, the only named plaintiff. 

    Sentinel next argued there was a lack of standing and the case should be dismissed under Rule 12 (b) (1), Fed. R. Civ. P. Sentinel conceded that Back2health had standing as to a New Jersey class. But Sentinel argued Back2health did not have standing as to putative out-of-state plaintiffs. The court disagreed. Article III standing was a constitutional requirement that directly impacted a court's subject-matter jurisdiction. In assessing Article III, a court had to assure itself of a party's standing. Third Circuit precedent did not raise concerns about a named plaintiff's standing to assert claims for putative out-of-state members. Sentinel's motion to dismiss for lack of standing was denied.

    

COVID-19 Claim Survives Motion for Judgment on the Pleadings

    In a well reasoned decision, the Superior Court in California denied the insurer's motion for judgment on the pleadings on a business interruption claim arising from COVID-19. Boardwalk Ventures CA, LLC v. Century-National Ins. Co., et al., 2021 Cal Super. LEXIS 35 (Cal. Super. Ct. March 18, 2021). The decision is here. 

    The insured operated a restaurant. After the pandemic struck and shut-down orders were issued, the insured submitted a claim for losses due to the suspension of its operations due to COVID-19. The insured sued after the claim was denied and the insurer moved for judgment on the pleadings.

    The insurer argued as a matter of law, that the insured could not allege the "direct physical loss of or damage to property" required for coverage under the policy. But the court found that the insured alleged such physical losses or damage based on COVID-19. The complaint alleged that "the virus can be present outside the human body in viral fluid particles, and can be transmitted and active on inert physical surfaces for a period of time." Further, "the presence of the virus particles renders items of physical property unsafe and impairs its value, usefulness and normal function." And finally, "the presence of people infected with the virus particles renders physical property in their vicinity unsafe and unusable, resulting in direct physical loss to that property." The insurer, in turn, cited no authority that had determined, as a mater of law, that these allegations were insufficient.

    Therefore, the motion for judgment on the pleadings was denied.  

California Federal District Court Denies, in Part, Insurer's Motion to Dismiss COVID-19 Business Interruption Claim

    In another victory for policy holders on business interruption claims arising from COVID-19, the federal district court denied the insurer's motion to dismiss on one of two claims. Kingray Inc. v. Farmers Group Inc., et al., 2021 U.S. Dist. LEXIS 41300 (C. D. Cal. March 4, 2021).

    Plaintiff Kingray Inc., who operated a sports bar and grill, and Plaintiff Nora's Style Salon, Inc. filed suit against Farmers when business interruption coverage was denied under plaintiffs' all risk policies. Government shut-down orders at the beginning of the COVID-19 pandemic caused plaintiffs to suffer loss of business income.

    Plaintiff alleged that as a result of the COVID-19 civil authority orders, they suffered "direct physical loss of and damage to" their properties. The were unable to use their properties for their intended purpose and were forced to suspend and curtail business operations, rendering their properties less useful and profitable. 

    Kingray's policy excluded "loss or damage cause by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness  or disease." This exclusion defeated Kingray's argument for coverage and its claims were dismissed.

    Nora's policy, however, did not include a virus exclusion. Nora's argued that the "or"  used in the phrase "direct physical loss of or damage to" demonstrated that "physical loss" was different from "physical damage." The court agreed it was possible that either the coronavirus or the "stay at home" orders caused "direct physical loss" to Nora's. Nora's was forced to shutter, rendering its property unusable for its only purpose - the operation of a business. If Nora's was not allowed to operate or invite others onto tis property, it was disposed in some way. Dispossession was a form of loss. It was plausible that "direct physical loss of" property included physical dispossession because of dangerous conditions (a virus in the air) or a civil authority order requiring Nora's to close.

    Therefore, Farmers' motion to dismiss was granted in part, denied in part. 
    

    

    

Delaware Court Determines Coverage Under Directors and Officers Policy

    The Delaware Supreme Court affirmed the trial court's finding of coverage under the Directors and Officers policy. RSUI Indemn. Co. v. Murdock, 2021 Del. LEXIS 90 (Del. March 3, 2021).

    In November 2013, Murdock, director and CEO of Dole Food Company, Inc., took the company private through a merger transaction in which Murdock acquired all of Dole's stock not already owned by him. The merger was approved by a 50.9% vote of disinterested stockholders. After the merger closed, Dole stockholders filed suit challenging the fairness of the transaction and alleging breach of fiduciary duty against Murdock and others (First Lawsuit). The trial court determined that Murdock and others breached their duty  of loyalty that and drove down Dole's pre-merger stock price. The court found that the merger was not a product of fair dealing. Damages of $148,190,590 were awarded.

    Dole gave notice to its insurers of the suit. Dole had a $15,000,000 D&O policy with AXIS. RSUI among other insurers, provided excess D&O coverage in policies that followed form to Dole's policy with AXIS. RSUI was Dole's eighth layer of D&O coverage, providing $10,000,000, payable upon the exhaustion of the underlying $75,000,000 in coverage. Without contribution from its insurers, Dole settled with the stockholders for the full amount of damages awarded by the trial court. 

    Before the settlement of the First Lawsuit, a second suit (Second Lawsuit) was filed as a class action composed of stockholders who had sold their stock before the merger and were therefore not parties to the First Lawsuit. The Second Lawsuit alleged violations of the Securities Exchange Act. Without consent or confirmation of coverage from the insurers, Dole negotiated a settlement of the Second Lawsuit, agreeing to pay $74,000,000. The layers below RSUI paid $7,000,000 towards the settlement, with Dole paying the remaining $67,000,000.

    RSUI and several of Dole's excess insurers filed suit seeking a declaratory judgment that they had no obligation to fund the settlement. The trial court ultimately entered judgment in favor of the insureds and against RSUI in the amount of $10,000,000, policy limits, plus $2,321,095 in prejudgment interest. 

    RSUI appealed. The first issue was whether the more favorable law to RSUI in California should apply over Delaware law. While Dole's headquarters were in California where its directors and officers lived, Dole was a Delaware corporation and also a citizen of Delaware. The court determined that Delaware had the most significant relationship to the policy and the parties.

    RSUI next argued that providing coverage for findings of fraud was against Delaware's public policy. Such a position would defeat the parties' contractual expectations. A blanket prohibition against insuring for losses arising from a director's or officer's wrongful acts (when based on fraud) would leave many injured parties without a means of recovery. Without guidance from the legislature, the court was unwilling to void RSUI's contractual obligations on public-policy grounds. 

    Next, the court considered wither the policy's Profit/Fraud Exclusion barred coverage. The exclusion provided there was no coverage based upon any profit or financial advantage gained or any willful fraudulent act if established in an adjudication adverse to the insured in an underlying action. Although the decision in the First Lawsuit applied the Profit/Fraud Exclusion, there was no adjudication in the Second Lawsuit because the matter was settled. The settlement in the Second Lawsuit meant the exclusion was not applicable. If RSUI was on the hook for the Second Lawsuit settlement, this alone exhausted its coverage limits, making consideration of the Profit/Fraud Exclusion moot. Dole's $67,000,0000 settlement contribution was more than enough to reach and exhaust RSUI's $10 million limits.

    Finally, the court considered Dole's allocation argument that the trial court erred in finding coverage even for non-covered claims. Dole argued for a "relative exposure" analysis, weighing the relative exposures between covered and non-covered losses. The trial court, however, applied the "larger settlement rule," under which a loss was fully recoverable unless the insurer could show that the liability for the non-covered conduct increased the insurer's liability. Since Dole was found to be liable as an aider and abetter to the same extent as Murdock, it appeared that Dole's actions could not have increased the First Lawsuit's settlement. Therefore, the trial court was also affirmed on this point of appeal.

     

Claims against Broker for Insufficient Coverage Fail

    After a coverage dispute for damage caused by Hurricane Harvey was settled, the insured's claims against its insurance broker for providing insufficient coverage were dismissed. Hitchcock Indep. Sch. Dist. v. Arthur J. Gallagher & Co., 2021 U.S. Dist. LEXIS 57452 (S.D. Texas Feb. 26, 2021). 

    The School District suffered $3.5 million in property damage after Hurricane Harvey struck. Its insurers denied coverage and the School District sued. During the litigation, the School District learned that the policies contained an arbitration clause and a New York choice of law provision. Rather than pursue its claims in arbitration, the School District settled with its insurers and sued its broker for failing to obtain insurance without arbitration or choice of law provisions. The broker moved to dismiss

    The School District claimed that it had to settle with the insurers for less than what it would have settled had the arbitration and choice of law provisions not been in its policies. The court found this novel theory to be based upon pure speculation. 

    The court determined that the School District had no claim for breach of fiduciary duty against the broker. The relationship between an insurance agent and an insured did not give rise to a formal fiduciary duty. An informal fiduciary relationship could arise where one person trusts in and relies upon another, whether the relationship is a moral, social domestic, or purely personal one. Such a duty required a special relationship of trust and confidence existing prior to, and apart from, the agreement made the basis of the suit. The fact that the broker had assisted the School District in the past was insufficient to give rise to a fiduciary relationship. 

    Nor were the claims for fraud, fraudulent, misrepresentation and intentional misrepresentation viable. The broker had no fiduciary duty to the School District, so it had no affirmative duty to disclose the presence of the arbitration clause and choice of law provisions. The School District could have easily discovered these provisions by simply reading the policy. 

    Therefore, the motion to dismiss was granted. 

Dental Practice Survives Motion to Dismiss on COVID-19 Claim

    The insured dental practice survived a motion to dismiss its business interruption claim arising from closures due to the coronavirus pandemic. Derek Scott Williams PLLC v. Cincinnati Ins Co., 2021 U.S Dist. LEXIS 37096 (N.D. Ill. Feb. 28, 2021). 

    On March 22, 2020, the Texas governor issued an order postponing all elective surgeries and non-emergency medical dental procedures. The insured dental practice complied with the order and did not resume normal business operations until May 4, 2020. This resulted in a loss of business income.

    The insured submitted claims to Cincinnati under business interruption and civil authority provisions of the policy. Cincinnati denied the claim and the insured sued. Cincinnati responded with a motion to dismiss. 

    Cincinnati argued there was no coverage for business interruption because the insured alleged no facts indicating that its property was physically altered. Cincinnati contended that the term "direct loss" required a physical loss, which it contended meant a physical alteration of the insured's property.

    Although the term loss was defined in the policy to mean either physical loss or physical damage, Cincinnati contended that it required physical damage. This interpretation wrote the term "loss" out of the definition. The court was persuaded that a reasonable fact-finder could find that the term "physical loss" was broad enough to cover a deprivation of the use of business property. Therefore, the insureds business income claims were viable.

    The civil authority claims were dismissed, however. The insured had not alleged that "access to the area immediately surrounding the damaged proper is prohibited by civil authority." The insured's complaint only alleged that it was precluded from conducting elective and non-emergency dental procedures, not form non-elective emergency procedures. Thus, there was no "prohibition" as the policy required. 

Insurer's Motion to Dismiss COVID-19 Claim Denied

    The federal district court denied the insurer's motion to dismiss the hotel's claim for business interruption coverage. Sunstone Hotel Investors, Inc. v. Endurance Am. Spec. Ins. Co., No. SACV 20-02185, (C.D. Cal. Feb. 26, 2021). 

    From February 24 to 27, 2020, the insured hotel hosted an international meeting of leaders from biotechnology company Biogen, Inc. After the hotel was notified on March 4, 2020, that three attendees tested positive for coronavirus, the hotel closed on March 12, 2020, and remained closed for months.

    The hotel submitted a claim to cover its losses, but coverage was denied. The hotel sued and the insurer moved to dismiss. 

    Coverage D of the policy stated the insurer would pay business interruption losses that directly resulted from Biological Agent Conditions that "result in Cleanup Costs covered under this Policy." The parties disputed the meaning of the modifier "covered under this Policy." The insurer argued that "Cleanup Costs covered under this Policy" included only those Cleanup Costs that exceeded the $100,000 self-insured retention (SIR). To make this argument, the insurer relied upon Coverage C, which stated that the insurer would only pay Cleanup Costs in excess of the SIR. Since the hotel had not incurred Cleanup Costs in excess of that amount, the insurer argued that the hotel's claim should be dismissed. 

    The hotel, on the other hand argued that the phrase "covered under this Policy" meant only fitting within the policy's definition of Cleanup Costs. The policy defined Cleanup Costs as "the reasonable and necessary costs incurred in performing Corrective Actions and/or Restorative Actions at a Scheduled Location," without regard to the SIR. Therefore, Coverage C's SIR was not a factor in determining what Cleanup Costs were covered under Coverage D and that the insured need not have incurred $100,000 in Cleanup Costs to obtain Coverage D coverage. 

    The court agreed with the hotel. Nowhere in Section D did it say that an insured must incur $100,,000 in Cleanup Costs to trigger Coverage D coverage. Instead, to find the limitation the insurer sought to impose, it was necessary to look in a whole other coverage section, one under which the hotel did not seek coverage. 

    Therefore the Motion to Dismiss was denied. 

Hawaii Supreme Court to Hear Bad Faith Case

    The Hawaii Supreme Court has granted certiorari to hear an appeal from the Intermediate Court of Appeals decision in Carvalho v. AIG Hawaii Insurance Company, 148 Haw. 370, 477 P.3d 164 (Haw. Ct. App. 2020). A summary of the ICA decision is here. The ICA reversed the trial court's granting of summary judgment to AIG on the bad faith count.

    Thanks to my blogging colleague, Mark Murakami (www.hawaiioceanlaw.com), for notifying me of the cert grant.

No Duty to Defend Under Renter's Policy

    The court agreed that the insurer had no potential liability under a policy where the insured allegedly concealed facts and made misrepresentations regarding the condition of the property it sold. State Farm Fire & Cas. Co. v. TFG Enterprises, LLC, 2021 Neb. LEXIS 27 (Neb. Feb. 19, 2021).

    TFG sold a house to Jeffrey Barkhurst. Thereafter, Barkhurst filed suit alleging that TFG failed to disclose and actively concealed several defects, including water intrusion, the presence of mold, substandard repairs and structural issues. State Farm agreed to TFG defend under a reservation of rights. State Farm then filed a declaratory judgment action to determine its obligations under the policy. 

    State Farm relied upon various exclusions in the rental policy issued to TFG. The exclusions provided there would be no liability coverage for "property damage to property owned by an insured"; "property damage to property rented to, occupied or used by or in the care of the insured"; or "property damage to premises the insured sells. . . if the property damage arises out of these premises."

    In the underling lawsuit, TFG admitted none of the conditions or defects identified in the Barkhurst's lawsuit existed when it bought the house. TFG further admitted that it used the house and the house was in its care and possession up until the time it was sold. 

    The lower court granted summary judgment to State Farm.  Any negligent misrepresentation by TFG did not cause property damage. Nor was there an occurrence. 

    The Nebraska Supreme Court affirmed, but focused on the policy exclusions. To the extent that the underlying lawsuit was one for property damage to the house, it fell squarely within each of the exclusions. It was undisputed that the house was owned, in the care of, and then sold byTFG. 

    Given the plain language of the exclusions, State Farm had no potential liability from the underliyng lawsuit under the rental policy.