Insurance Law Hawaii

Pennsylvania Trial Court Denies Insurer's Motion to Dismiss COVID-19, Business Interruption Claim

    The insured successfully alleged that the presence of virus particles in its gym constituted a loss, allowing it to survive the insurer's Motion to Dismiss the business interruption claims. Brown's Gym, Inc. v. The Cincinnati Ins. Co., No. 20-3113 (Pa. Ct. Cm Pl. July 13, 2021). 

    The insured contended that virus particles were present on its property and were sufficient to establish a claim of "direct physical loss" under the policy. The all risk policy did not include a virus exclusion, but did provide a separate "communicable disease or virus" exclusion for "crisis event response communication expense coverage." Therefore, the insured has a reasonable expectation that COVID-19 related damages would be covered, but excluded from the crises event response communication expense coverage. 

    

Eighth Circuit Affirms Dismissal of COVID-19, Business Interruption Claim

    In what appears be the first federal appellate decision on COVID-19 business interruption claims, the Eighth Circuit affirmed the district court's dismissal of the insured's claim based upon closure due to the pandemic. Oral Surgeons, P.C. v. Cincinnati Ins. Co., 2021 U.S. App. LEXIS 19775 (8th Cir. July 2, 2021).

    After the Iowa governor declared a state of emergency and imposed restrictions on dental practices, the insured stopped performing non-emergency procedures in late March 2020. Oral Surgeons resumed procedures in May 2020 when restrictions were lifted. 

    Oral Surgeons submitted a claim to Cincinnati which was denied. The policy insured Oral Surgeons against lost business income sustained due to the suspension of operations "caused by direct 'loss' to property." The police defined "loss" as "accidental physical loss or accidental physical damage." Cincinnati denied the claim because there was no direct physical loss or physical damage to Oral Surgeons' property. Oral Surgeons sued and the complaint was dismissed. 

    On appeal, Oral Surgeons maintained that the COVID-19 pandemic and the related government-imposed restrictions on performing non-emergency dental procedures constituted a "direct 'loss' to property" because the insured was unable to fully use its office. The court determined there must be some physicality to the loss or damage of property, e.g., a physical alteration, physical contamination, or physical destruction. The policy did not cover mere loss of use when the insured's property suffered no physical loss or damage. This construction of the policy accorded with coverage of lost business income during the "period of restoration." Property that suffered physical loss or physical damage required restoration. That the policy provided coverage until property "should be repaired, rebuilt or replaced" or until business resumes elsewhere assumed physical alteration of the property, not mere loss of use. 

    The complaint did not allege any physical alteration of property. No facts were alleged to show that Oral Surgeons had suspended activities due to direct "accidental physical loss or accidental physical damage." The district court's judgment was affirmed. 

Insurer Motion to Intervene in Underlying Case Denied

    The Colorado Supreme Court determined that the insurer defending under a reservation of rights could not intervene in the underlying case after the insured assigned its rights to any bad faith claim against the insurer. Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass'n, Inc., 2021 Colo. LEXIS 365 (Colo. May 24, 2021).

    Bolt Factory initiated a construction defects lawsuit against various contractors. Several defendants filed third-party complaints against subcontractors, including Sierra Glass Company. Auto-Owners agreed to defend its insured, Sierra Glass, under a reservation of rights. Auto-Owners declined to settle with Bolt Factory for $1.9 million, within policy limits. Sierra Glass then retains independent counsel and entered into a settlement with Bolt Factory. The settlement allowed Sierra Glass to assign its bad faith claims to Bolt Factory in exchange for the right to pursue the insurer for payment of the excess judgment rather than Sierra Glass. Instead of entering into a stipulated judgment, Bolt Factory and Sierra Glass proceeded to an abbreviated trial.

    The parties submitted proposed findings of fact and conclusions of law. Sierra Glass did not present a defense. Auto-Owners sought to intervene to protect its interest in the non-adversarial trial. The lower court denied Auto-Owner's motion. The court entered judgment in favor of Bolt Factory and against Sierra Glass in the amount of $2.4 million. The court of appeals affirmed. The Supreme Court granted Auto-Owners' petition for certiorari review.

    The Colorado Supreme Court found that the agreement between Sierra Glass and Bolt Factory was permissible under Colorado law. Faced with Auto-Owners' refusal to settle within policy limits, Sierra Glass took steps to protect itself by entering into an agreement with Bolt Factory - an agreement that included both an assignment of claims and a covenant not to execute. The lower court had discretion of requiring the parties to agree to a stipulated judgment or proceed to an uncontested trial where the court itself determines damages.

   Auto-Owners was not allowed to intervene because its interests in the litigation were not impaired. Auto-Owners could sufficiently protect its interests in a subsequent declaratory judgment action regarding coverage. Auto-Owners could also raise its claims and defenses in any bad faith action that Bolt Factory might bring against Auto-Owners pursuant to the assignment of claims.

    The judgment of the court of appeals was affirmed. 

    Thanks to Margie Arnovitz of Dale Barton Agency in Salt Lake City for sending me this case.

 

Civil Authority Claim Survives Motion to Dismiss

    The Rhode Island Superior Court denied the insurer's motion to dismiss a claim under Civil Authority coverage related to closures of business due to COVID-19. Atwells Realty Corp. v. Scottsdale Ins. Co., 2021 R.I. Super. LEXIS 40 (R.I. Super. Ct. June 4, 2021). 

    Atwells operated a nightclub. Executive Orders issued in March 2020 interrupted Atwells' business operations because Atwells could not lawfully operate its nightclub. Atwells filed a claim with its carrier, Scottsdale, under the policy's Business Income and Civil Authority coverages. Scottsdale denied coverage because the losses suffered by Atwells were not "direct physical damage to property" and losses due to a virus were excluded under the policy. Further losses under the Civil Authority provision were not covered because the policy required "damage to property within one mile of [Atwells'] premises from a covered loss, and the prohibition on access is taken in response to dangerous physical conditions." 

    Atwells sued and Scottsdale moved to dismiss. Scottsdale argued that Atwells failed to allege, and admitted, that there was no direct physical loss of or damage to the premises as required for Business Income Coverage. The court interpreted the provision to require that the loss of business income must have occurred during the "period of restoration," that is, while the premises was being repaired, rebuilt, or replaced. Because Atwells did not allege that its operations were suspended in order for it to repair the property such as a restoration effort to rid the premises of COVID-19, it did not plead facts sufficient for a prima facie case that coverage for the loss of business income exists under the policy. Instead, Atwells alleged it could have used its property for its ordinary functions but for the Executive Orders. 

    Scottsdale also argued there was no Civil Authority coverage because Atwells' could still access its property for some operations, such as carry out food. Atwells contended that the Executive Orders declared that the threat of COVID-19 was present everywhere in the state, including within one mile of its property and the dangerous physical conditions created by the virus were such that all access to the property was prohibited. Atwells further argued that COVID-19, a substance that could survive on surfaces, caused damage to property within one mile from its premises and that the Executive Orders shut down Atwells' business as a result of the virus being spread throughout the state, including the properties within one mile of Atwells.

    The court agreed that substances that could not be seen but could survive in the air or on surface of property. Further, a substance that could make persons within a premises sick and the premises uninhabitable could be considered to cause direct physical loss of or damage to property. Therefore, Atwells' claim for Civil Authority Coverage could not be denied on a motion to dismiss.

    Further, the virus exclusion did not eliminate Civil Authority Coverage. Scottsdale pointed to no language in the policy under which the virus exclusion would apply to other property that caused loss to the insured. 

 

        

Insured's Claim for Hurricane Damage Survives Summary Judgment

    The insurer's motion for summary judgment seeking a determination that the insured's alleged hurricane damage was due to pre-existing loss was rejected by the court. Exhibit Network Int'l v. Union Ins. Co., 2021 U.S. Dist. LEXIS 114267 (S.D. Texas May 25, 2021). 

    The insured alleged that wind and rain from Hurricane Harvey damaged its property's roof, flashings, and interior. Prior to the hurricane, the insured had the roof inspected by Pyramid Water Proofing, Inc. Minimal leaks were found but the roof membrane appeared to be in fair condition given the age of the roof. Replacement was advised, but it was not immediately required. The insured did not replace the roof. 

    After Hurricane Harvey struck, the insured found water damage in the building in an area with a pre-Harvey roof leak, a new leak in the shop area and wet ceiling tiles, and a wet floor upstairs. No claim was filed because the damage did not seem serious. A year later heavy rain caused leaking in the same areas. The insured hired a public adjuster who determined the damage was caused by winds from Hurricane Harvey. The claim was reported to Union Insurance 15 months after Hurricane Harvey. 

    Union's adjuster observed signs of normal deterioration and wear and tear, but no signs of storm damage. The claim was denied. Suit was filed and Union moved for summary judgment. 

    Union first argued that the claim was not promptly provided as required by the policy. The insured contended it was not aware of the roof damage resulting from Harvey until a year after the hurricane when heavy rains caused substantial leaks. The public adjuster had found that the damage to the roof was caused by Hurricane Harvey. The court could not find as a matter of law that a reasonable jury could not return a finding that the insured's notice was within a reasonable time after the occurrence.

    Moreover, Union had to show prejudice from the late notice in order to avoid liability under the policy. Union complained that it could not insect the property at the time of the alleged damages and was denied access to critical evidence such as the condition of the roof after the hurricane. But Union did not identify any intervening events that likely changed the condition of the roof. The conflicting reports from Union's adjuster and the insured's public adjuster created a fact issue as to whether the delay between Hurricane Harvey and the insured's notice of the damage prejudiced Union's ability to investigate the cause of the damage. Therefore, Union's summary judgment motion was denied. 

Mortgagors Seek Coverage Under Mortgagee's Policy

    The mortgagor homeowners survived a motion to dismiss their claim for coverageunder the lender's property policy after their home suffered hurricane damage. Gary v. Am. Sec. Ins. Co., 2021 U.S. Dist. LEXIS 100010 (W.D. La. May 26, 2021). 

    Plaintiffs' home was mortgaged by Pennymac Loan Services, LLC. Pennymac held a property policy with American Security to insure its interest in the home. Plaintiffs were not named as insureds or additional insureds under the policy. Plaintiffs were identified as the borrowers under the policy on the Declarations page. 

    After hurricane damage to their home, plaintiffs sued American Security for coverage for the losses. American Security moved to dismiss, arguing plaintiffs were neither additional insureds nor third party beneficiaries. Lender-placed policies were designed to insure the lender's collateral whenever the borrower failed to maintain adequate insurance. The Loss Payment provisions in the policy stated that "Loss will be made payable to the named insured [Pennymac]. No coverage will be available to any mortgagee other than that shown as the named insured on the Declarations." 

    Plaintiffs argued that the policy imposed certain duties on them, including cooperating with American Security in any investigation of a claim. After an adjuster inspected the property, an agent of American Security mailed the plaintiffs a letter explaining American Security's adjustment of the loss and included a net payment for loss in the amount of $240.76. The loss adjustment report listed the plaintiffs as the insured.

    American Security argued that even though the policy obllgated the plaintiffs to cooperate, the Payment of Loss section clearly named Pennymac as the beneficiary of the policy. 

    Nevertheless, the court noted that the case ws in its infancy and wanted to allow plaintiffs an opportunity to amend. Therefore, the motion to dismiss was denied.

Exclusion for Construction of Condominiums Includes Faulty Construction of Retaining Wall

    The exclusion for suits arising out of construction of condominiums encompassed the underlying claim for faulty construction of a retaining wall. HT Serv., LLC v. Western Heritage Ins. Co., 2021 U.S. App. LEXIS 16259 (10th Cir. June 1, 2021).

    HT Services was a land developer. HT Services designed and constructed a residential community. The AOAO sued HT Services for negligent design and construction of a retaining wall. When its carrier, Western Heritage Insurance Company, denied coverage, HT Services sued. The district court granted summary judgment to Western.

    The exclusion eliminated coverage for claims or suits "arising out of, relating to or in any way connected with 'your operations' . . . involving the development [or] construction . . . of . . . condominiums . . . or . . . residential structures." HT Services argued that a retaining wall was not a "residential structure." 

    The Tenth Circuit agreed with the district court. Because the retaining wall was constructed as part of the development of the residential community, the HOA's allegations concerning defects in the retaining wall fell within the exclusion. 

    Coverage was also barred under exclusion j (6), which prevented coverage for property damage to "that particular part of any property that must be restored, repaired, or replaced because 'your work' was incorrectly performed." The allegations of the underlying complaint asserted that the AOAO suffered damages resulting from HT Services' "defectively . . . constructed retaining walls," which were squarely within the exclusion. 

    Therefore the district court's granting of summary judgment was affirmed and there was no duty to defend.

 

Court Dismisses Coverage Action In Lieu of Pending State Case

    The insurer's coverage action was dismissed by the federal court in favor of the pending case in state court. Southern-Owners Ins. Co. v Marquez, 2021 U.S. Dist. LEXIS 108125 (S.D. Fla. May 4, 2021).

    The underlying lawsuit was filed because of of an incident involving a golf cart on a sidewalk owned by the AOAO. The Marquezes owned the golf cart that injured the Murphy's child.

    Southern-Owners issued a CGL policy to the AOAO. The Marquezes submitted a claim to Souther-Owners for coverage in the underlying lawsuit as additional insureds under the policy. Southern-Owners defended the AOAO and the Marquezes in the underlying lawsuit pursuant to a reservation of rights. The underlying complaint alleged that the Marquezes negligently permitted their daughter to operate the golf cart on the AOAO's pedestrian walkway. Further, the AOAO negligently failed to reasonably maintain the premises. 

    Southern-Owners filed suit for a declaratory judgment in federal court, arguing there was no coverage for the Marquezes under the policy. Members of the AOAO were additional insureds "only with respect to liability arising out of the ownership, maintenance, or repair of that portion of the premises which is not reserved for that member's exclusive use or occupancy." Southern-Owners argued that the Marquezes' liability in the underlying suit arose out of their ownership of the golf cart. 

    Southern-Owners also filed a motion to intervene and a motion to stay in the underlying lawsuit. The motion to intervene was granted, but the motion for stay was denied. The Marquezes then filed a counterclaim against Southern-Owners seeking a declaration that the AOAO's policy afford coverage for the underlying a]lawsuit, 

    In the federal case, the Marquezes filed a third party complaint against the AOAO, seeking a declaration that the AOAO failed to obtain a policy of insurance for coverage of incidents arising out the use of the common areas. The AOAO moved to dismiss the third party complaint. The court also requested briefing on whether it should retain jurisdiction of this declaratory judgment action.

    In regards to the third party complaint, the court found that this matter and the underlying lawsuit were parallel. The parties were sufficiently similar. A judgment in the federal declaratory action would not settle the controversy or serve a useful purpose in clarifying the legal relations at issue. Moreover, the underlying factual issues were important, and could bear on the federal court's interpretation of the documents. The state court was in a better position to address the factual issues. Accordingly, the court declined to exercise jurisdiction and dismissed the operative complaints without prejudice. 

 

 

    

Court Denies Motion to Dismiss Retailer's COVID-19, Business Interruption Claim

    The insured furniture retailer survived a motion to dismiss its business interruption claim after government orders caused disruption of the insured's operations due to COVID-19. Susan Spath Hegedus v. Ace Fire Underwriters Ins. Co., 2021 U.S. Dist. LEXIS 88041 (E.D. Pa. May 7, 2021).

    Plaintiff operated two locations in California. Plaintiff had an all-risk policy from Ace. When the pandemic struck, county and state orders shuttered plaintiff's business as non-essential. Plaintiff filed a claim for lost business income. Ace denied the claim because the losses did not arise from any direct physical loss or damage to property, and were barred by the policy's virus exclusion. Plaintiff filed suit and Ace moved to dismiss.

    The court found that plaintiff plausibly stated claims for coverage related to business income. The Business Income Additional Coverage portion of the policy required "direct physical loss of or damage to" property. This disjunctive language indicated the two phrases could not be synonymous, or they would be redundant. The allegations in plaintiff's complaint regarding its suspension of operations could plausibly constitute a "direct physical loss of . . . property at the described premises," because plaintiff lost the ability to physically operate its business. The phrase "direct physical loss of or damage to" was ambiguous as used in the policy. Therefore, the plaintiff's alleged loss of property that plausibly fell within the scope of the policy was sufficient to survive the motion to dismiss. 

    Addressing the virus exclusion, the court noted that the complaint alleged it was the government shutdown orders that caused the losses, not the virus. The complaint did not allege the presence of the virus at the premises. It alleged that the government orders caused its losses when its business operations were suspended. Regardless of what may have precipitated the closure order, the virus continued to exist. Accordingly, it was the order to shut down the business that forced the closure. The argument that the orders themselves caused the losses, or were at least the predominant cause of its losses, was also sufficient to defeat the motion to dismiss. 

Summary Judgment Granted to Hotel Chain in COVID-19 Claims

   

    A New Hampshire Superior Court granted a hotel chain summary judgment on its suit for coverage due to losses caused by COVID-19. Schleicher & Stebbins Hotels, LLC v. Starr Surplus Lines Ins. Cos., No. 217-2020-00309 (N.H. Super. Ct. June 15, 2021). 

    Government orders were issued restricting the operation of the hotels in March 2020. In April 2020, the hotels were deems as "lodging providers," meaning they had to restrict lodging to vulnerable populations and essential workers only. When the hotels were allowed to reopen they continued to face a number of restrictions. They could accept overnight reservations from in-state residents but not provide lodging to out-of-state visitors unless the visitors completed a fourteen-day quarantine.

    The policies required "direct physical loss of or damage to property" in order to recover business loss. Coverage was denied by the insurers because the properties were not physically damaged. The loss of revenue and closures were due to the governmental orders to slow the spread of the virus. 

    Cross-motions for summary judgment were filed. The hotels sought a declaratory ruling that "Any requirement under the policies of "direct physical loss or damage to property" was met where property is impacted by the coronavirus." The court rejected the insurers argument that "distinct and demonstrable" changes to property must be demonstrated and be capable of remediation, or result in dispossession. The court concluded that the term "direct physical loss of or damage to property" encompassed the kind of damage caused by the spread of SARS-CoV-2 to the hotels' property. The hotels' motion for summary judgment while the motions by all but one of the insurers was denied. 

    One of the hotels' insurers, Axis, survived the insured's summary judgment motion because its contamination exclusion barred coverage. The court agreed that SARS-CoV-2 was a "virus" that was 'dispersed" by persons with COVID-19. The other insurers' reliance on their Microorganism Exclusion was rejected. Competing views from other courts on whether a virus, such as SARS-CoV-2 was a "microorganism." The exclusion had to be construed narrowly and against the insurer. Therefore, the competing views meant that "a virus is not unambiguously understood to be a 'microorganism.'"