Insurance Law Hawaii

Additional Dismissals of COVID Business Interruption, Civil Authority Claims

    Among the recent decisions dismissing complaints for business interruption and civil authority coverage due to closures caused by COVID-19 are Pappy's Barber Shops, Inc. v. Farmers Group, Inc., 2020 U.S. Dist. LEXIS 166808 (S.D. Calif. Sept. 11, 2020) and Sandy Point Dental v. Cincinnati Insurance Co., 2020 U.S. Dist. LEXIS 171979 (E.D. Ill. Sept. 21, 2020). The difficulty in proving "direct physical loss" was the downfall of both cases.

    In Pappy's, claims were made for business income losses insured as a result of local and state closure orders. The policy required "direct physical loss of or damage to property at the described premises." Plaintiffs argued that "direct physical loss of" did not require a tangible damage or alteration to property and that the loss of the ability to continue operating their businesses as a result of the government orders met this requirement. 

    The court relied upon a prior decision, 10E, LLC v. Travelers Indem. Co. of Connecticut, 2020 U.S. Dist. LEXIS 165252 (C.D. Calif. Sept. 2, 2020) [post here], where the court noted that under California law, losses from inability to use property did not amount to "direct physical loss" within the meaning of the policy. 

    The claim under civil authority failed because the complaint did not allege that any of the orders prohibited plaintiffs from access to their business premises, but only alleged that plaintiffs were prohibited from operating their businesses. Further, the orders were not issued due to direct physical loss of or damage to property other than at plaintiffs' premises. 

    The result was similar in Sandy Point Dental. After shutdown orders, dental offices could only operate to provide emergency and non-elective work, but not routine work. Plaintiff did not allege that there was any demonstrable, physical alteration to the property. Instead, plaintiff argued the policy allowed for a partial loss to property from loss of use. But the court found that "direct physical loss" unambiguously required some form of actual, physical damage to the property. The words "direct" and "physical," which modified the word "loss," connoted actual harm of some form to the premises itself, rather than forced closure of the premises due to reasons extraneous to the premises itself. The property had not been altered since the shutdown orders and plaintiff did not have to make any repairs or change any part of the building to continue its business. 

    The civil authority claim failed for much the same reason. The complaint did not allege that the coronavirus caused direct physical loss to other property. Consequently, the motion to dismiss was granted.

Spoiled Beer is a Covered Loss, But No Claim for Loss of Income

    The insured's claim for the cancellation of a beer order due to COVID-19, leading to its spoiling, was not covered for loss of business income. Harvest Moon Distributors, LLC v. Southern-Owners Ins. Co., 2020 U.S. Dist. LEXIS 189390 (M.D. Fla. Oct. 9. 2020).

    Harvest Moon purchased beer under a contract with Walt Disney Parks and Resorts. Before the product shipped, Disney closed its operations to the COVID-19 pandemic and refused to accept the beer delivery. Harvest Moon submitted a claim to Southern for loss of business income caused by the pandemic. Southern denied the claim and Harvest Moon filed suit. Southern moved to dismiss. 

    The complaint alleged that the beer spoiled when Disney closed due to the pandemic, and that the spoliation of the product was a direct physical loss under the policy. The court agreed that these were sufficient allegations to plead a plausible claim that the spoiled beer constituted a covered loss because the beer was allegedly inedible. 

    The business income provision of the policy stated the insurer would pay for the suspension of operations during the "period of restoration." The complaint merely alleged that Disney suspended operations, not Harvest Moon. There were no allegations that Harvest Moon suspended its operations or underwent any period of restoration.  

    Policy exclusions also had to be considered. The policy did not cover losses or damages caused by delay, loss of use or loss of market. Nor did the policy cover losses caused by acts or decisions of any person, group, organization or governmental body. The court found that the Harvest Moon's loss arose from Disney's act of refusing the beer, not from the pandemic. COVID-19 itself did not damage the beer. The beer would not have been damaged but for Disney's decision, making Disney the cause of the alleged spoliation. Further, the complaint stated that Harvest Moon experienced "loss of use" of its product, which was expressly excluded from coverage.

    Therefore, the complaint was dismissed without prejudice to allow Harvest Moon the opportunity to file an amended complaint. 

Business Risk Exclusions Bar Faulty Workmanship Claim

    The manufacturer of roofing and waterproofing systems was unsuccessful in securing coverage for alleged faulty workmanship due to the "your work" and "your product" exclusions. Siplast, Inc. v. Emplrs Mut. Cas. Co., 2020 U.S. Dist. LEXIS 176539 (N.D. Texas Sept. 25, 2020). 

    Siplast was sued in New York by the Archdiocese for work done at Cardinal Spellman High School. The Archdiocese purchased a Siplast Roof System for the high school. Vema Enterprises installed the roof system. The roof system was covered by a guarantee. 

    After completion, school officials noticed water damage in the ceiling tiles throughout the school. A consultant hired by the Archdiocese concluded that the leaks were caused by the workmanship and the materials that were compromising the entire roof membrane and system. Siplast determined the guarantee was not applicable. The Archdiocese informed Siplast that it would repair the roof and hold Siplast liable for the costs. Siplast gave notice of the claim to Employers, but coverage was denied.

    The Archdiocese sued. The complaint alleged that the only way to remediate the leak issue was to replace the failed membrane and system with a new one. The consultant estimated the total cost of remediation would be $5,000,000. 

    Siplast sued Employers. Siplast maintained that the Archdiocese had alleged claims based on an "occurrence" because they alleged they sustained damage due to faulty work and products. The Archdiocese did not allege that Siplast expected or intended any damage. The court agreed with Siplast that there was an occurrence. The origin of the property damage was alleged to be defects with the workmanship and materials that comprised the roof membrane and system. There were no allegations that Siplast intended or expected its roofing system to fail. 

    However, the next inquiry was whether the business risk exclusions applied. The policy did not apply to "'property damage' to 'your product' arising out of it or any part of it." Nor did the policy apply to "'property damage'' to 'your work' arising out of it or any part of it." The "your work" exclusion reflected the intent of the insurer to avoid the possibility that coverage under a CGL policy would be used to repair and replace the insured's defective products and faulty workmanship.

    Employers argued that the Archdiocese was seeking to recover from Siplast only the cost of a replacement roofing system, not any damage that resulted to the school from the defective roof. Siplast contended that because the interior damage to the school was separate from any damage to the Siplast materials on the school roof, Employers would not meet its burden to show the "Your Product/Your Work" exclusions applied. 

    The court concluded that although the underlying complaint mentioned damage to school property other than the Siplast roofing products, the Archdiocese did not make any allegations to recover from Siplast for any damage to the building caused by the leaky roof that was separate from the damage to Siplast's product. Siplast was sued based on its failure to replace the roof as required by the guarantee. The Archdiocese did not allege that Siplast's breach caused other damage. 

    Therefore, Employer did not have a duty to defend Siplast because the damages sought in the underlying suit fell within the "Your Work'Your Product" exclusions.

 

California Federal District Court Finds No Business Interruption Coverage for Hawaii Business

    The federal district court in California dismissed the business interruption claim arising from COVID-19 by a Hawaii store chain. Water Sports Kauai v. Fireman's Fund Ins. Co., 2020 U.S. DIst. LEXIS 209547 (N.D. Cal. Nov. 9, 2020).    

    Sand People closed its twelve stores on three islands six months ago due to the spread of the coronavirus and government shut down orders. It submitted a claim for coverage to its insurer, Fireman's Fund. The claim was denied.

    Sand People filed a class action, which included a Hawaii subclass of businesses in Hawaii insured by Fireman's Fund who made a claim arising from lost business income due to COVID-19 and did not obtain coverage for the claim. Fireman's Fund moved to dismiss, arguing the mere threat of coronavirus was insufficient to show a "direct physical loss of or damage to" covered property and the government closure orders were likewise insufficient. 

    Sand People argued that coronavirus was rapidly spreading in Hawaii, but failed to allege both its presence in any of its properties and a manifestation of imminent threat of contamination of any of its properties. There were no facts plausibly alleging an actual exposure at one or more of Sand People stores, much less that an actual physical exposure caused them to close a particular store or set of stores. 

    Sand People argued it suffered a "loss of" its property and "material alteration" of the property was not required. It argued that "loss" broadly included a deprivation, dispossession, and impairment of property, similar to what it suffered here due to the government orders shutting down non-essential businesses. But the case law required some physical tangible injury (like total deprivation of property) to support "loss of property or a physical alteration or active presence of a contaminant to support "damage to" property. Having failed to so plead, the claim was dismissed with leave to amend.

    The claim for civil authority coverage suffered the same result. The preventative closure orders could not support a causal link of direct physical loss of or damage to property. 

    

Alaska Supreme Court Finds Insurer Owes No Independent Duty to Injured Party

    After the victim incurred injury inflicted by an insured party, the Alaska Supreme Court determined that the insurer owed no duty to the injured party. Martinez v. Government Employees Ins. Co., 2020 Alaska LEXIS 111 (Alaska Sept. 4, 2020).

    Joshua Martinez lost control of his truck and crashed into Charles Burnett's cabin. The cabin's heating fuel tank was damaged, and fuel drained onto the property and under the cabin. Burnett further alleged he suffered bodily injuries.

    Martinez was insured by GEICO under an auto policy. Two days after the accident, the state Department of Environmental Conservation (DEC) advised GEICO to hire a qualified environmental consultant and crew to clean up the fuel spill. Burnett told GEICO he wanted to do the cleanup himself and offered to do so for $25,000, the approximate amount of the consultant retained by GEICO. DEC did not consider Burnett qualified to handle the cleanup. 

    The parties were at an impasse for over a year. The fuel spread further across Burnett's property, but was finally cleaned up by GEICO's consultant. 

    Burnett sued Martinez and GEICO while his property was still awaiting cleanup. After the cleanup was completed, GEICO paid Burnett the limits of Martinez's policy to settle and release all claims against Martinez, though he reserved his claims against GEICO. The trial court then granted summary judgment to GEICO on Burnett's remaining claims, finding that GEICO owed him no duty. On appeal, the Supreme Court reversed, holding that GEICO may owe Burnett an independent duty as defined by Restatement (Second) of Torts sec. 323 (Negligent Performance of Undertaking to Render Services). 

    The trial court held an evidentiary hearing on the single issue of whether GEICO owned Burnett an independent duty in its conduct of the fuel oil cleanup. The court found there was no such duty and entered final judgment for GEICO.

    Burnett appealed again. The Supreme Court noted that the basis of Burnett's claim was not failure or wrongful conduct during GEICO's normal adjusting activities on behalf of its insured, but rather whether there was an independent and separate agreement between GEICO and Burnett. The trial court found there was no such duty. There was no proof that GEICO undertook a duty to Burnett to clean up the fuel spill on his property through an agreement with him, separate and independent of its duties to Martinez. The trial court also found that GEICO never represented to Burnett that it was proposing to clean up the spill as an independent service or benefit to him. Further, Burnett never believed that GEICO was proposing to clean up the spill as an independent service or benefit to him. 

    Therefore, the trial court did not err when it found that Burnett and GEICO never reached an independent agreement regarding spill cleanup.

Virus Exclusion Leads to Dismissal of COVID-19 Business Interruption, Civil Authority Claims

    The court dismissed the insured business interruption and civil authority claims due to the policy's virus exclusion. Franklin EWC, Inc. v. Hartford Fin. Servs. Group, 2020 U.S. 174010 (N.D. Calif. Sept. 22, 2020). 

    Franklin operated the European Wax Center. It was forced to close on March 19, 2020, due to State and other public health orders because of  COVID-19. Franklin suffered business losses and laid off 30 employees. Franklin filed a claim with the insurer seeking coverage under the policy for business income lost due to the closure orders. The insurer denied the claim and Franklin sued. The insurer moved to dismiss. 

    The policy contained a virus exclusion stating the insurer would not pay for loss or damage caused directly or indirectly by a virus. Franklin's complaint repeatedly alleged that the virus caused the risk of direct physical loss required for a Covered Cause of Loss. A Covered Cause of Loss was defined as a "risk of direct physical loss," unless the loss was excluded under the policy. Thus, as the loss was caused directly or indirectly by the virus, the virus exclusion applied. 

    Franklin argued even if the virus exclusion applied, there was still coverage for civil authority. The Covered Cause of Loss was the closure orders that created the "risk of direct physical loss." Franklin therefore argued that the loss was created by the closure orders rather than the virus, and therefore the virus exclusion did not apply,

    The court disagreed. The civil authority provision provided that it applied when access was prohibited by order of the civil authority "as the direct result of a Covered Cause of Loss." Franklin argued that the closure orders were issued as the direct result of the closure orders, a claimed Covered Cause of Loss. However, the closure orders could not have been issued as a result of the closure orders; instead, as the complaint alleged, they were issued as the direct result of COVID-19 - a cause of loss that fell within the virus exclusion.

Missouri Federal District Court Again Denies Insurer's Motion to Dismiss COVID-19 Claim

    Following its earlier decision, the federal district court rejected the insurer's motion to dismiss claims for business interruption due to closure orders caused by COVID-19. Blue Spring Dental Care, LLC v. Owners Ins. Co., 2020 U.S. Dist. LEXIS 172639 (W.D. Mo. Sept. 21, 2020).

    Plaintiffs were four dental clinics impacted by Stay at Home Orders issued by state and local officials. Plaintiffs alleged that  COVID-19 and the orders forced them to suspend most of their business operations and deprived them of the use of their dental clinics, thus causing them to suffer "a direct physical loss."

    Plaintiffs submitted claims for business interruption to Owners, who denied the claims. Plaintiffs sued and Owners moved to dismiss. 

    The court relied upon its prior decision in Studio 417, Inc. v. Cincinnati Ins. Co. [post here]. As in Studio 417, plaintiffs adequately pled a claim for direct physical loss. They alleged that "it is likely customers to the insured properties over the recent month were infected with the coronavirus," they "suspended operations due to COVID-19 to prevent physical damage to the premises by the presence or proliferation of the virus and the physical harm it could cause persons present there" and that "customers cannot access the property due to the Stay at Home Orders for fear of being infected with or spreading COVID-19." Plaintiffs plausibly alleged that COVID-19 physically attached itself to their dental clinics, thereby depriving them of the possession and use of the insured properties.

    Nevertheless, Owners contended that even if plaintiffs could demonstrate direct physical loss, they did not suspend their dental clinic operations because they continued to see patients on an emergency basis. The court found that plaintiffs' allegations that three of their four dental clinics totally ceased all clinical operations satisfied their pleading burden. 

    The court also found plaintiffs adequately pled claims for Extra Expense and Civil Authority. Owner's motion to dismiss was denied in its entirety. 

Hawaii Federal District Rejects Another Construction Defect Claim

    The Federal District Court, District of Hawaii, continued it long line of cases finding no coverage for claims of faulty workmanship. Nautilus Ins. Co. v. Summary Judgment RMB Enters., 2020 U.S. Dist. LEXIS 200468 (D. Haw. Oct. 28, 2020).

    Property owners entered a construction contract with RMB Enterprises to develop and construct residential structures and a pond. The pond walls enclosed residential spaces, providing structural foundations for the walls of the building. After completion of the project, the pond leaked into its pump room. RMB performed remedial work by injecting epoxy into cracks. Later, water from the pondleaked into the interior of a residence near a staircase. Water also leaked into the master bedroom area causing musty odor, mood growth, and increased humidity. 

    The owners sued RMB asserting breach of contract, breach of warranty, misrepresentation, and negligence claims. Nautilus denied coverage. The policy provided that faulty workmanship did not constitute an "occurrence." But when faulty workmanship caused property damage to property other than "your work," then such property damage would be considered caused by an occurrence. 

    Nautilus sued RMB for a declaratory judgment on coverage. RMB defaulted and the owners intervened. Nautilus moved for summary judgment.

    The court first determined that it could retain jurisdiction of the case. The court then found that there was no occurrence. It was well established under Hawaii law that contract and contract-based tort claims were not occurrences. Under governing law, breach of contract and breach of warranty claims were not covered. The same was true of misrepresentation and negligence claims. The negligence claims asserted that RMB owed a duty of care in the performance of its work and it breached that duty. These claims were predicated on the contractual relationship between the owners and RMB; they were not independent tort claims. Therefore, RMB's alleged acts were not "accidents" and were not covered. 

    Nor did RMB's work fall within the policy's exception to the definition of occurrence. The owners suggested that damage to the residence was an "occurrence," as it was property other than the pond. The court determined this description misrepresented the nature of the property, a residential compound integrating and connected to the pond. And even if the pond and residence were independent of one another, the dispositive inquiry was whether RMB caused property damage to property other than its work. The underlying complaint alleged that RMB caused property damage to its own work. 

    Therefore, summary judgment was granted to Nautilus. 

Sellers' Alleged Misrepresentation Does Not Amount To An Occurrence

    The insurer successfully established on summary judgment that the insureds' alleged misrepresentation in the sale of a condominium was not an occurrence. Novak v. St. Maxent-Wimberly House Condo., 2020 U.S. Dist. LEXIS 167397 (E.D. La. Sept. 14, 2020). 

    State Farm issued the sellers a condominium unit owner's policy. The buyers sued the sellers, contending the sellers had made misrepresentations in the sale process. The sellers allegedly failed to disclose defects in the condominium before and at the time of the sale. State Farm intervened, seeking a declaration that it was not required to defend or indemnify the sellers because there was no occurrence.

    The sellers asserted that the buyers could be seeking damages for physical damage to and loss of use of the condominium. While this could constitute "property damage" under the policy, the sellers failed to explain how the damage could be considered to be caused by an occurrence. Therefore, State Farm's motion for summary judgment was granted. 

    

First Judgment Entered for Policyholders in COVID-19 Claim

    The insureds' motion for summary judgment seeking coverage for business interruption due to the COVID-19 pandemic was granted by the North Carolina Superior Court. North State Deli, LLC, et al. v. The Cincinnati Ins. Co., No. 20-CVS02569, Order Granting Plaintiffs' Motion for Partial Summary Judgment (Super. Ct. N.C., entered Oct. 9, 2020). This was the first ruling in the country finding in favor of policyholders for coverage for business income loss resulting from the COVID-19 pandemic. The order is here [Order].

    Plaintiffs operated seven restaurants in North Carolina. The restaurants were insured by "all-risk" policies from Cincinnati, which offered business interruption coverage. The policies defined "loss" as "accidental physical loss or accidental physical damage." 

    Plaintiff sought coverage for losses arising out of the COVID-19 pandemic. Beginning in March 2020, governmental authorities entered orders mandating the suspension of business operations at various establishments, including plaintiffs' restaurants. Coverage for business interruption was denied and plaintiffs sued. Plaintiffs moved for summary judgment.

    The court initially noted that the policies did not define "direct," "physical loss," or "physical damage." Dictionary definitions led the court to determine that "direct physical loss" described the scenario where business owners and their employees, customers, vendors, suppliers, and others lost the full range of rights and advantages of using or accessing their business property. This was precisely the loss caused by the government orders. Plaintiffs were expressly forbidden by government decree from accessing and putting their property to use for the income-generating purposes for which the property was insured. Therefore, this loss was unambiguously a "direct physical loss" and the policies provided coverage. 

    The policies provided coverage for "accidental physical loss or accidental physical damage." Cincinnati's argument that the policies require physical alteration conflated "physical loss" and" physical damage." The use of the conjunction "or" meant that a reasonable insured could understand the terms "physical loss" and "physical damage" to have distinct and separate meanings. Under Cincinnati's argument, however, if "physical loss" also required structural alteration to property, then the term "physical damage" would b e rendered meaningless.

    Finally, nothing in the policies excluded coverage for plaintiffs' losses. The policies did not exclude virus-related causes of loss.

    Therefore, the policies provided coverage for business income for plaintiffs' loss of use and access to covered property mandated by the government orders as a matter of law. The motion for partial summary judgment was granted.