Insurance Law Hawaii

Exhaustion of Primary Policy Triggers Excess Coverage

    The Ninth Circuit affirmed the district court's ruling that the excess policy was triggered by settlements exhausting the primary policy. Westport Ins. Corp. v. California Cas. Management Company, 2019 U.S. App. LEXIS 4889 (9th Cir. Feb. 20, 2019). 

    Doe 1, Doe 2 and Doe 3 filed suit against the insured, Moraga School District, and three of its administrators for alleged sexual abuse by a teacher. The District was insured under primary general liability policies from 1991 through 1997. From October 1, 1994 to October 1, 1997, Westport also issued a series of annual excess policies that covered the District and its employees. California Casualty issued success liability policies to the Association of California School Administrators from July 1, 1986 to July 1, 2000, providing excess liability coverage to the District's school administrators.

    Doe 1 alleged abuse during policy periods 1993-94, 1994-95, and 1995-96; Doe 2 alleged she was molested in the 1995-96 and 1996-97 periods. Does 3 alleged that she was molested in the 1996-97 period. Westport eventually settled the three suits for an aggregate sum of $15.8 million. California Casualty refused to reimburse Westport. Westport sued and secured summary judgment.

    The court divided each Doe's settlement equally across the policy period(s) in which she alleged she was molested. Next, the court reduced each policy period amount by 25 percent to reflect the District's liability. Then, the court deducted $1 million from each policy period in accordance with Wesport's Primary policy limit. Finally, the court assessed liability against California Casualty up to $150,000 for each Administrator in each policy period. In total, the district court found California Casualty liable for $2.6 million of the $15.8 million paid to the Does collectively. Dissatisfied with the result, California Casualty appealed. 

    On appeal, the Ninth Circuit noted that California Casualty's policy was an excess policy requiring only that the "underlying primary collectible insurance or self-insurance" be exhausted before its coverage began. The policy required the exhaustion of only "primary" or "self" insurance as opposed to "all other" insurance or "primary and excess" insurance. Westport's policy, on the other hand, stated, "If there is any other collectible insurance available to the insured . . . this insurance will apply in excess of other collectible insurance. Accordingly, California Casualty's policy applied upon the exhaustion of the $1 million of underlying insurance, not after exhaustion of all other insurance. 

    California Casualty had denied excess coverage in the face of settlement demands far exceeding the primary layer. Therefore, it waived its argument that the lack of contemporaneous allocation of liability in the settlements precluded subsequent apportionment. The three settlement agreements released the District and the Administrators from liability and did not differentiate among the defendants. Given the blended pleadings and working of the settlement agreements, the district court did not abuse its discretion in allocating the liability equally among the District and the three administrators. Therefore, the district court's judgment was affirmed.

    Thanks to Damon Key blogging colleague Mark Murakami for the heads up on this case. 

    

Liability Cap Does Not Exclude Defense Costs for Loss Related to Deep Water Horizon

    The Texas Supreme Court found that Lloyd's endorsement imposing a cap on liability for a joint venture did not exclude coverage for defense costs. Anadarko Petroleum Corp. v. Houston Cas. Co. et al., 2019 Texas LEXIS 53 (Texas Jan. 25 2019j.

    Pursuant to a joint venture agreement, Anadarko held a 25% ownership interest in the Macondo Well in the Gulf of Mexico. When the well blew out, numerous third parties filed claims against BP entities and Anadarko. Many of the claims were consolidated into a multi-district litigation (MDL). The MDL court granted a declaratory judgment finding BP and Anadarko jointly and severally liable. BP and Anadarko reached a settlement in which Anadarko agreed to transfer its 25% ownership interest to BP and pay BP $4 billion. In exchange, BP agreed to release any claims it had against Anadarko and to indemnify Anadarko against all other liabilities arising out of the Deepwater Horizon incident. BP did not agree, however, to cover Anadarko's defense costs.

    Anadarko had a policy through Lloyd's. The policy provided excess-liability coverage limited to $150 million per occurrence. Lloyd's paid Anadarko $37.5 million (25% of the $150 million limit) based upon Anadarko 25% ownership in the joint venture. Anadarko argued that Lloyd's still owed all of Anadarko's defense expenses, up to the $150 million limit. 

    The policy did not obligate Lloyd's to defend Anadarko, but only to reimburse for defense costs. Lloyd's contended that an endorsement, The "Joint Venture Provision" reduced the $150 limit when Anadarko's liability arose out of the operations of a joint venture in which Anadarko had an ownership interest. The endorsement provided that Lloyd's liability was "limited to the product of (a) the percentage interest of Anadarko in the Joint Venture and (b) the total limit afforded Anadarko under the policy." Based on the product of Anadarko's percent interest in the Deepwater Horizon joint venture (25%) and the total coverage limit under the policy ($150 million), Lloyd's argued that the cap on excess liability coverage was $37.5 million, which had already been paid to Anadarko. 

    The trial court granted summary judgment to Anadarko, but the court of appeals reversed.  

    Before, the Texas Supreme Court, Anadarko argued that the phrase "as regards any liability of Anadarko which is insured under the policy" limited Lloyd's liability for Anadarko "liability . . . insured," which did not include its defense expenses. Lloyd's, on the other hand, submitted that the reference to Anadarko's "liability . . . insured" included defense expenses. The Texas Supreme Court concluded that "liability" referred in the policy to an obligation imposed on Anadarko by law to pay for damages sustained by a third party who submitted a written claim. The Joint Venture Provision's reference to "any liability of Anadarko which is insured" under the policy did not refer to Anadarko's defense expenses. Although both Anadarko's liabilities and defense expenses were insured, the policy distinguished between the two and the Joint Venture Provision applied only to liabilities, not to defense expenses. 

    Accordingly, the court of appeal's judgment was reversed, Anadarko's motion for partial summary judgment was granted, and the case was remanded to the trial court for further proceedings. 

    

    

Consequential Damage Claims for Insurer's Bad Faith Dismissed

    Partial dismissal of the insured's complaint seeking consequential damages for the insurer's bad faith was granted by the court. Bryant v. General Cas. Co., 2019 U.S. Dist. LEXIS 15369 (N.D. N.Y. Jan. 30, 2019).

    Bryant purchased from General Casualty Company of Wisconsin (GCCW) a commercial property and casualty policy to cover the insured premises. While the building was rented to a tenant who operated a restaurant, it sustained a collapse. GCCW refused to cover the loss. Bryant sued. In addition to the cost of repairing and replacing the damage to the property, Bryant alleged he was out the value of rental revenue from his tenant, which was forced to close the restaurant and relocated as a result of the unrepaired damage. 

    In the original complaint, Bryant sued for breach of contract and breach of the implied covenant of good faith and fair dealing. GWWC moved to dismiss the consequential damages claim. In the amended complaint, the second count was eliminated, suggesting that he was not pursuing a separate bad faith claim. Further, the amended complaint was for a single count and did not plausibly allege facts sufficient to sustain a claim of bad faith arising from GCCW's breach of the implied covenant of good faith and fair dealing. The allegations accused GWWC of not satisfying the claim in the amount, or on the precise timeline, that Bryant thought was appropriate under the circumstances. The allegations, if accepted as true, plausibly amounted to GCCW's alleged non-performance of its obligations under the policy. They did not, however, amount to additional, bad faith behavior that would warrant compensation beyond the policy limits. 

    Therefore, the amended complaint did not plausibly alleged bad faith and Bryant's claim for consequential damages was dismissed 

Sorting Insurers' Obligations in Light of Competing Other Insurance Provisions

    The court determined that the non-participating insurer must reimburse the insurer who defended. Steadfast Ins. Co. v. Greenwich Ins. Co., 2019 Wisc. LEXIS 9 (Wis. Jan. 25, 2019). 

    Historic rains hit Milwaukee in June 2008, overwhelming the Milwaukee Metropolitan Sewage District's (MMSD) sewage system. Raw sewage backed up into 8,000 homes. Lawsuits were filed against MMSD and two companies who MMSD contracted with the operate and maintain the sewage system, Veolia Water Milwaukee and United Water Services Milwaukee. 

    MMSD's Operating Agreement with United Water required United Water to maintain comprehensive liability insurance, naming MMSD as an additional insured. United Water secured a policy with Greenwich Insurance Company, with the last policy period beginning July 24, 2007 and ending July 24, 2008. The policy named MMSD as an additional insured United Water maintained that it last provided services to MMSD on February 29, 2008.

    Beginning on March 2, 2008, and continuing through the June 2008 heavy rains, MMSD contracted with Veolia to operate the sewage system. Veolia had liability insurance with Steadfast Insurance Company naming MMSD as an additional insured.

    MMSD tendered the lawsuits to both Steadfast and Greenwich The lawsuits were settled without MMSD paying any damages. Steadfast reimbursed MMSD for $1.55 million in defense costs. Greenwich refused to contribute to the defense because its policy ended before the June 2008 rains. Greenwich relied on its "other insurance" clause to argue that its policy was excess to Steadfast's policy. 

    Steadfast sued Greenwich to recover the $1.55 million in defense costs it paid to MMSD. The circuit court granted summary judgment to Steadfast, awarding the entire amount Steadfast paid MMSD, as well as $25,000 in attorney fees that Steadfast incurred in bringing the lawsuit. The court of appeals affirmed.

    The Wisconsin Supreme Court noted that the plain language of both the Greenwich and Steadfast policies obligated the insurers to indemnify and defend their named insureds and MMSD against claims of damage caused by the negligence of their named insureds. The "other insurance" clauses did not apply unless the two policies were concurrent. Two policies could not be concurrent unless the insured the same risk, and the same interest, for the benefit of the same person, during the same time period. Here, Greenwich would owe MMSD only if the negligence of United Water caused damages for which MMSD was held responsible. Likewise, Steadfast would ow MMSD only if the negligence of Veolia caused damages for which MMSD was held responsible. The "other insurance" provisions were not relevant because Greenwich's "other insurance" clause provided successive insurance to MMSD 

    Further, Greenwich's policy provided potential coverage for a claim made in the lawsuits based on sewage backups. Therefore, Greenwich breached its duty to defend, and was responsible for all damages that naturally flowed from the breach. 

    The court also held that Steadfast was not entitled to full reimbursement of defense costs, but the defense costs should be allocated between Steadfast and Greenwich. The court adopted the pro rata allocation method to apportion the defense costs based on the insurers' policy limits. 

    Finally, Steadfast was entitled to recover attorney fees from Greenwich under contractual subrogation. Because Greenwich breached its duty to defend, MMSD had the right to request fees for successfully establishing Greenwich's obligation to defend. Because MMSD's rights of recovery against Greenwich would include attorney fees incurred in successfully establishing coverage, Steadfast was entitled to recover $325,000 in fees from Greenwich as MMSD's subrogee. 

Business Risk Exclusions (j) 5 and (j) 6 Found Ambiguous

    Reversing the district court's grant of summary judgment in favor of the insurer, the Tenth Circuit found that exclusions (j) 5 and (j) 6 were ambiguous as applied to the facts of the case. MTI, Inc. v. Emplrs. Ins. Co., 2019 U.S. App. LEXIS 2543 (10th Cir. Jan. 25, 2019).

    Western Farmers Electrical Cooperative (WFEC) owned cooling towers which were serviced by MTI, Inc. Wausau provided a CGL policy to MTI. 

    in 2011, MTI found that anchor bolts in Cooling Tower 1 were corroded. WFEC hired MTI to make repairs by installing new anchor castings with anchor bolts and anchor adhesive. 

    On May 23, 2011, MTI employees removed all of the corroded anchor bolts in Tower 1. Because the adhesive applicator had not yet arrived, MTI did not immediately install new anchor bolts. On the night of May 24, strong winds struck the tower, causing it to lean and several structural components broke. Due to the extent of the structural damage, removal and replacement of the tower was determined to be the only viable option. 

    WFEC demanded MTI pay the cost of removing and replacing the entire tower, which totaled over $1.4 million. MTI filed a claim for coverage with Wausau. Coverage was denied based on business risk exclusions (j) 5 and (j) 6. 

    MTI sued and Wausau moved for summary judgment. The district court agreed that the events fell within the scope of both exclusions j(5) ad j (6) and entered judgment in favor of Wausau. 

    On appeal, the Tenth Circuit considered whether the exclusions were ambiguous. Exclusion j (5) barred coverage for property damage to "that particular part . . . on which you . . . are performing operations, if the 'property damage' arises out of those operations." Similarly, exclusion j (6) excluded property damage to "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." The key phrase for this appeal was "that particular part." 

    As favored by MTI, the phrase "that particular part" could be read to refer solely to the direct object on which the insured was operating. Alternatively, Wausau argued it applied to those parts of the project directly impacted by the insured party's work. The court found the former interpretation was reasonable. Therefore, the phrase was ambiguous and had to strictly and narrowly construed in a matter favorable to the insured party. 

    Here the "particular part" on which MTI was "performing operations" and upon which work "was incorrectly performed" was reasonably understood to be the anchor bolts. Those bolts were "distinct component parts" of the tower. MTI performed work incorrectly by removing them without promptly replacing them or bracing the structure. It was objectively reasonable that MTI would expect coverage for the cost of replacing the entire tower, including all of its operational elements, given the ambiguous language of exclusions j (5) and j (6). 

    Therefore, the district court's grant of summary judgment in favor of Wausau was reversed and the case remanded for further proceedings. 

    

Insured's Complaint for Breach of Contract and Bad Faith Adequately Pleads Consequential Damages

    The appellate court overturned the trial court's dismissal of the insured's complaint seeking consequential damages. D.K. Prop. Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh v, Pa., 2019 N.Y. App. Div. LEXIS 329 (N.Y. App. Div. Jan. 17, 2019). 

    The insured's building began to shift and exhibit structural damage, including cracks, after construction began in an adjoining building. The insured submitted a claim under its commercial insurance policy. The insurer did not pay the claim, nor did it disclaim coverage. 

    The insured sued, alleging breach of contract for failure to pay covered losses under the policy. The second cause of action was for breach of the implied covenant of good faith and fair dealing. The complaint also requested consequential damages in connection with each cause of action. The trial court granted the insurer's motion to dismiss the claim for consequential damages.

    The issue was whether, at the pleading stage, a claim for consequential damages arising from the insurer's processing of the claim, required a detailed factual description or explanation for why such damages, which did not directly flow from the breach, were also recoverable. The complaint alleged that rather than pay the claim, the insurer made unreasonable and increasingly burdensome demands for three years. The insured alleged that this was a tactic to make the claim so expensive to pursue that the insured would abandon it. The investigatory process had taken so long that the structural damage to the building worsened. Among the consequential damages alleged were engineering costs, painting, repairs, monitoring equipment and moisture abatement to address water intrusion, loss of rents, and other expenses attributable to mitigating further damage to the property. 

    An insured could sue for consequential damages resulting from an insurer's failure to provide coverage if such damages were foreseen or should have been foreseen when the contract was made. At the pleading stage, the question was whether the plaintiff had stated a claim, not whether the plaintiff was able to establish its claim. Here, the insured met the pleading requirements with respect to consequential damages. Despite the insurer's call for a heightened pleading standard, an insured's obligation to "take all reasonable steps to protect the covered property from further damage by a covered cause of loss" supported plaintiff's allegation that some or all of the alleged damages were foreseeable. 

Coverage for Climate Change

Presentation at ABA’s Insurance Coverage Litigation Seminar on coverage for climate change in Tucson this morning. My co-panelists were Rina Carmel and Karin Aldama  it was our fifth year of presenting together.

Finding of No Coverage Overturned Due to Lack of Actual Policy

    The Appellate Division overturned a verdict for the insurer when the actual policy was never introduced at trial. Pennsylvania Lumbermens  Mut. Ins. Co. v. B&F Land Dev. Corp., 2019 N.Y. App. Div. LEXIS 264 (N.Y. App. Div. Jan 16, 2018). 

    The decedent was killed when he fell through a skylight while working on a premises owned by B&F Land Development Corporation. The estate sued B&F for wrongful death.

    B&F tendered to its carrier, Pennsylvania Lumbermens Mutual (PLM). PLM issued a reservations of rights. It later denied coverage because the location of the loss was not a location listed on the policy, an exclusion barred coverage for bodily injury arising out of B&F's ongoing operations conducted by it or on its behalf, and the loss was not reported to PLM as soon as practicable. 

    PLM sued B&F and the estate for a declaratory judgment that it had no duty to defend or indemnify. A default judgment was entered against B&F after it failed to answer. Trial proceeded against the estate

    At trial, the only witness PLM called was Francis Santoro, its vice president of claims. The court admitted into evidence a cop of the policy which was proffered by PLM. The copy of the policy was complied by Santoro based upon information contained in the underwriting file, but did not specify a location for which the policy applied. The policy admitted into evidence also had a different description of an endorsement titled "Exclusion-Designated Ongoing Operations" than the copy of the policy that PLM had produced during discovery. When questioned about the discrepancy, Santoro did not know which version of the endorsement applied to the policy issued to B&F. The estate did not call any witnesses. The trial court issued a judgment in favor of PLM.

    The appellate court observed that the best evidence rule required the production of an original writing where its contents were in dispute and were sought to be proven in a case. An exception to the rule allowed secondary evidence of the contents of an unproduced original upon threshold factual findings by the trial court that the proponent of the substitute had sufficiently explained the unavailability of the primary evidence and had not procured its loss or destruction in bad faith.

    Here, PLM failed to offer any explanation as to the unavailability of the primary evidence, i.e., the original policy. PLM also did not establish that the copy of the policy proffered at trial was a reliable and accurate portrayal of the original. Therefore, the trial court should not have admitted into evidence the copy of the policy proffered by PLM. The matter was remanded for a a new trial. 

    

Suit Limitation Provision Upheld

    The policy's one year suit limitation provision was upheld, depriving insureds of benefits under the policy. Oswald v. South Central Mut. Ins. Co., 2018 Minn. App. Unpub. LEXIS 1077 (Dec. 24, 2018). 

    The Oswalds' hog barn burned down on June 21, 2016. Arson was a possible cause. 

    The Oswalds were insured under a combination policy issued by North Star Mutual Insurance Company and South Central Mutual Insurance Company. Central provided coverage for basic perils, broad perils, and limited perils, which included fire losses. The Central policy required property claims to be brought within one year after the loss. By endorsement, the North Star policy required suits be brought within two years after the loss. Presumably, the claims was denied, although the decision does not state this.

    During the investigation of the cause of the fire, the Oswalds attempted to serve a complaint on Central on June 1, 2017, alleging breach of contract, unjust enrichment, and breach of good faith and fair dealing. The Oswalds failed to properly serve Central and moved to dismiss their complaint without prejudice. The dismissal was granted. The Oswalds then filed an almost identical complaint on September 25, 2017, and properly served the complaint. Central file a motion to dismiss because the suit was filed past the one-year limitation contained in the policy. The motion was granted. 

    On appeal, the court found the one-year limitation was not inherently unreasonable. While investigating the cause of the fire, the Oswalds still managed to file a complaint before the one-year deadline. Had the Oswalds properly served Central, they would have commenced a suit regarding their current claims within the one-year limitations period. Nor was there any statute prohibiting the one-year limitation period. 

    The Oswalds also argued that the policy was ambiguous. The policy continuously referred to the two insurance companies as "we" or "us" instead of including a clear delineation between the two companies. But the policy also clarified that all its terms "applied to both companies listed on the declarations unless otherwise designated." 

    The Oswalds contended that the policy did not provide a clear and unambiguous limitations period. However, the one-year limitation was clearly stated within the policy conditions. 

    Finally, the one-year limitation was not tolled due to either fraudulent concealment or equitable principles. The Oswalds failed to identify an affirmative statement which concealed a fact, defeating their argument for tolling the one-year limitation due to fraudulent concealment. Equitable tolling was inappropriate when there were no circumstances beyond the plaintiffs' control that prevented service of a complaint within the limitations period. Here, the Oswalds attempted to commence a suite within the one-year limit, but failed for reasons within their control. Thus, equitable tolling was inappropriate. 

    Consequently, the lower court's dismissal was affirmed. 

Exclusion Used to Deny Claim for Cyber Fraud Found Ambiguous

    The policy's false pretense exclusion relied upon the insurer to deny coverage for an act of cyber fraud was found ambiguous. Rainforest Chocolate v. Sentinel Ins. Co., 2018 VT LEXIS 140 (Vt. Dec. 28, 2018).

    Rainforest Chocolate, LLC was insured under a business-owner policy issued by Sentinel. In May 2016, a Rainforest employee received an email purportedly from his manager, directing the employee to transfer $19,875 to an outside bank account through an electronic-funds transfer. After the transfer was made, the employee discovered a fraudster had taken control of the manager's email account and had directed the transfer. Rainforest contacted the bank, which froze it account and limited the loss to $10,261.36.    

    Rainforest reported the loss to Sentinel. Sentinel denied coverage, primarily relying on an exclusion for physical loss or physical damage caused by False Pretense that concerned "voluntary parting" of the property. 

    Rainforest sued Sentinel. The parties filed cross-motions for summary judgment. The trial court granted Sentinel's motion and entered judgment. Rainforest appealed. 

    Rainforest argued that the False Pretense Exclusion did not apply because it only excluded "physical loss or physical damages" and the loss here was not a physical loss. The Vermont Supreme Court found the reasoning of the Montana Supreme Court, construing the same provision, to be reasonable. Ad Advert Design, Inc. v. Sentinel Ins.,, 2018 U.S. Dist. LEXIS 165467 (D. Mont. Sept. 26, 2018).

    The False Pretense Exclusion was ambiguous. Just because funds, whether or not in current use, fell under the policy's definition of "money" did not mean that "money" could only be subject to physical loss. The Forgery provision of the policy stated that Sentinel "will pay for loss resulting directly from forgery . . . in 'money.'" The Money and Securities provision stated that Sentinel "will pay for loss of money,'" while the Computer Fraud provision said that Sentinel will pay "for physical loss or physical damage to 'money.'" This differing use of "physical loss" and "loss" meant it could not be said that all "money" was subject solely to physical loss simply because funds, whether or not in current use, qualified as "money" under the policy. 

    The policy used the two distinct phases - "physical loss and physical damage" and "loss and damage" - within different sections throughout the policy, sometimes switching between the two sentence to sentence, which would lead the average reader to assume there was some difference between them. But the policy itself did not define or explain the difference between the two phrases. Construing the phrase in Rainforest's favor, the loss was not physical and thus coverage was not barred by the False Pretense Exclusion. 

    Still at issue, however, was whether the loss was covered by any of the policy's provisions, including Forgery and Money and Securities. The case was remanded for the trial court to determine whether the remaining provisions provided coverage for Rainforest's loss.