Insurance Law Hawaii

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 immediatelysurrounding 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. 

Illinois Federal District Court Finds Duty to Defend COVID-19 Claim

    The federal district court found that the insurer had a duty to defend the underlying suit based on damages allegedly arising from exposure to COVID-19. McDonald's Corp. v. Austin Mutual Ins. Co., No. 20 C 5057, Order (N.D. Ill. Feb.22, 2021). The decision is here. 

    McDonalds was sued for pubic nuisance and negligence based on its decision to remain open during the COVID-19 pandemic without enhanced health and safety standards. The underlying plaintiffs sought an injunction requiring McDonalds to: (1) provide employees with adequate protective equipment; (2) preclude the reuse of face masks; (3) supply hand sanitiser; (4) require that customers wear face masks; (5) monitor employee COVID-19 infections; and (6) provide employees with accurate information about COVID-19. 

    The suit was tendered to Ausin Mutual, but coverage was denied. Austin Mutual contended that the underlying suit did not seek "damages because of bodily injury." McDonalds responded that but for the underlying plaintiffs contracting COVID-19 (a bodily injury) it would not have to expend money as "damages" to comply with the mandatory injunction in the underlying suit. Further, exposure to the virus constituted "bodily injury" and money spent to comply with the mandatory injunction would constitute "damages" "because of" the exposure to the virus.

    McDonalds sued. Austin Mutual moved to dismiss. Regarding "damages," the court found that the mandatory injunction sought by the underlying plaintiffs was also a "damage" because it would require McDonalds to expend money to remediate the continuous and ongoing exposure to the virus. 

    Considering the phrase "because of," the policy did not say "proximately because of," but merely said "because of." So simple "but for" causation was enough. McDonalds had adequately alleged "but for" causation because "but for" the underlying plaintiffs actual contraction of COVID-19, McDonalds would not have to incur "damages" to comply with a mandatory injunction. Therefore, McDonalds met it burden of alleging that it might be on the hook for "damages" "because of" or "but for" the employees contracting COVID-19. 

    Finally, three employees had suffered  "bodily injury" by contracting the virus. Further, if the underlying plaintiffs prevailed, McDonalds would have to spend money to prevent the virus from entering the restaurants, and to eliminate or mitigate its presence in the restaurants. Those strategies would decrease the risk of bodily injury from exposure to the virus and from the possibility of reinfection. Further, Austin Mutual could have explicitly included a virus exclusion had it intended to not provide coverage for "bodily injury" caused by a virus. 

    Austin Mutual's motion to dismiss was denied.

Insured's Claim Under Computer Transfer Fraud Provision Denied

    The Fifth Circuit upheld the district court's denial of coverage under the policy's Computer Transfer Fraud provision. Mississippi Silicon Holdings, L.L.C. v. Axis Ins. Co., 2021 U.S. App. LEXIS 3112 (5th Cir. Feb. 4, 2021).

    Mississippi Silicon Holdings' (MSH) chief Financial Officer, John Lalley, received an email from a regular vendor, Energoprom, advising that future payments should be routed to a new bank account. The email body also contained previous emails between Lalley and Energoprom concerning invoices and shipment details. Lalley authorized two wire transfers from MSH to Energoprom's new bank account totaling approximately $1.025 million. 

    In December 2017, MSH realized it had sent the wire transfers to the fraudster's bank account, not that of Energoprom. MSA submitted a sworn proof of loss to Axis. The claims was granted under the Social Engineering Fraud provision and Axis paid MSH the $100,000 policy limit. Coverage under the Computer Transfer Fraud provision, with a limit of $1 million, was denied. Axis determined that the Computer Transfer Fraud provision did not apply because: (1) the funds were transferred with MSH employees' knowledge; and (2) the fraud was accordingly not confined to the computer system, as the policy required. 

    The Computer Transfer Fraud provision read:

The insurer will pay for loss of . . . Covered Property resulting directly from Computer Transfer Fraud that causes the transfer, payment, or delivery of Covered Property from the Premises or Transfer Account to a person, place, or account beyond the Insured Entity's control, without the Insured Entity's knowledge or consent. 

MSH contended that the receipt of the fraudulent email fell within the Computer Transfer Fraud provision. Axis argued the Computer Transfer Fraud provision was not implicated because the scheme only involved emails that did not have any functionality that permitted them to do anything other than sit in MSH's email system. 

    MSH sued. Both parties moved for summary judgment. The district court granted summary judgment to Axis because the loss was not caused by the fraudulent computer use, but by the affirmative acts of MSH employees in initiating and authorizing the transfer. 

    On appeal, the Fifth Circuit agreed with Axis. The manipulation of emails did not constitute Computer Transfer Fraud as defined by the policy. The fraudsters apparently gained access to the company's email system, but they did not manipulate those systems through the introduction of data or programs that could independently instruct the computer system to act upon electronic data. Unfortunately for MSH, coverage did not extend to the fraud scheme at issue here.

Oklahoma Finds Policy Can Be Assigned Post-Loss

    Oklahoma joined the majority of court in finding that after a loss occurs, the insured can assign the policy to another. Johnson v. CSAA Gen. Ins. Co., 2020 Okla LEXIS 118 (Okla. Dec. 15, 2020).

    Johnson's property was damaged in a storm. She filed a claim with her insurer. She also executed an assignment of her claim in order to repair the property with the execution of assignment to Triple Diamond Construction LLC. An appraiser retained by Triple Diamond determined the storm damage was $36,346.06. The insurer paid only $21,725.36 for the loss.

    Johnson and Triple Diamond sued the insurer for breach of contract, seeking $14,620.70, not inclusive of interest, attorneys' fees and costs. The insurer filed a motion to dismiss, or an alternative motion for summary judgment to dismiss Triple Diamond as a party. The insurer argued that both the policy and an Oklahoma statute barred the assignment. The district court granted the insurer's motion.

    After review of Oklahoma law and cases across the country on assignments of a policy post-loss, the Supreme Court reversed. Distinguishing between an assignment of a policy and an assignment of a post-loss chose in action which did not increase the insurer's risk was recognised by the majority of courts as implementing an important public policy. An assignment by an insured possessing an insurable interest when the subject of the assignment was a post-loss chose in action was valid in Oklahoma. The district court's dismissal of Triple Diamond was reversed. 

 

Life Insurance Claim Against Employer Prevails In Ninth Circuit Review

    The estate's claims against the life insurance company failed, but the Ninth Circuit remanded for further review claims against the decedent's employer. Estate of Foster v. Am .Marine Sys. Group Ben. Plan, 2021 U.S. App. LEXIS 3555 (9th Cir. Feb. 9, 2021). 

    The estate filed suit under the civil enforcement provision of ERISA against American Marine Corporation (American Marine) and United Omaha Life Insurance Company (United) alleging defendants wrongfully denied a claim for life insurance benefits after the decedent died of oesophageal cancer on June 24, 2016. The district court dismissed some claims and granted summary judgment to defendants on remaining claims. 

    The decedent worked for American Marine as a Health, Safety, Environmental & Security Manager. He became terminally ill in March 2015. On February 1, 2016, American Marine laid him off, but assisted him in filing a claim with United for long-term disability (LTD) benefits.  The application for LTD was approved on February 15. American Marine also allowed the decedent to exhaust twenty accrued vacation days and thirty-five accrued sick days before he stopped receiving a salary. Therefore, he was on the payroll until April 15. LTD benefits continued until the decedent's death on June 24. 

    The estate filed a claim with United for life insurance benefits. The claim was denied because American Marine had stopped paying life insurance policy premiums on his behalf as of April 30. This appeal addressed whether the decedent received sufficient notice that his life insurance coverage would end on that date unless he converted the policy to an individual policy and started paying the premiums himself. 

    American Marine employees were entitled to group life insurance benefits under a policy issued by United and administered by American Marine. The decedent had been given a life insurance handbook explaining how to convert the policy when an individual terminated work at American Marine. If any employee's life insurance ended because his employment ended, he was entitled to a "conversion privilege," meaning that he could apply for an individual policy within thirty-one days. If the employee died during the conversion period, United would pay the amount of group life insurance the employee was entitled to convert.

    United concluded that the decedent was ineligible for life insurance benefits when he died because American Marine stopped paying premiums on April 30 and the decedent failed to exercise his conversion privilege within thirty-one days, or by May 31. 

    On appeal, the Ninth Circuit noted that as a fiduciary, American Marine had an obligation to convey complete and accurate information material to the beneficiary's circumstance, even when a beneficiary did not specifically ask for the information. American Marine argued that the handbook apprised the decedent of his conversion rights. But the Ninth Circuit held that American Marine was required to provide further explanation under the circumstances. 

    Although the decedent had the handbook, it was ambiguous as to the exact date that the thirty-one day conversion clock started. It could have been February 29, or the last day of the month in which he was laid off. It could have been April 30, the last day of the month when the decedent was no longer being paid. Or it could have been a later date, so long as American Marine continued paying premiums and the decedent remained totally disabled. 

    Therefore, a genuine issue of material fact existed as to whether the decedent knew when his coverage would expire. While summary judgment in favor of United was upheld, the district court decision that American Marine had no duty to notify the decedent that his life insurance would end on April 30, 2016, other than sending him the handbook, was in error. 

No Coverage for Insured Who Plants Hidden Camera in Neighbors' Bathroom

    The homeowners policy did not cover the insured after he was sued for planting a hidden camera in the bathroom of his neighbors. State Farm Fire & Cas. Co. v. Rodriguez, 2021 U.S. Dist. LEXIS 22161 (D. Haw. Feb. 5, 2021). 

    The insured's neighbors brought suit alleging that the insured secretly installed a hidden miniature camera in their bathroom. The discovery of the camera shocked and outraged the neighbors and their girls, aware that someone had snuck into their home and placed a hidden camera in their upstairs bathroom. The underlying action alleged that the insured was arrested and had pleaded no contest to criminal charges. A SIM card from the camera revealed several pictures of the neighbors and their girls in the bathroom and a few pictures of the insured who appeared to be adjusting the camera as it was installed. The neighbors sued the insured. 

    The insured tendered to State Farm under his homeowners and umbrella policies. Coverage was denied and State Farm filed suit for a declaratory judgment that it had no duty to defend or indemnify.

    The court found there was no occurrence under the homeowners policy. The underlying action alleged no "accident." Under Hawaii law, an occurrence could not be the expected or reasonable foreseeable result of the insured's own intentional acts or omissions. The underlying complaint described entirely intentional acts by the insured by placing a hidden camera without permission of the neighbors. Nor did the underling action alleged an bodily injury. The policy stated that bodily injury did not include "emotional distress, mental anguish  . . . or any similar injury . . ." Even if the underlying complaint did allege a bodily injury, the injury would still be excluded as "either expected or intended by the insured" or "the result of wilful and malicious acts of the insured."

    Nor was coverage owed under the umbrella policy. Again, there was no accident because the insured's acts were entirely intentional or knowing.

Insured's Claims Under Communicable Diseases Coverage Survive Motion to Dismiss

    While the court determined the virus or bacteria exclusion precluded coverage under business income, extra expense, or civil authority for the insured's COVID-19-related shutdown, the insurer's motion to dismiss was denied based upon the communicable diseases coverage. Salon XI Color & Design Group v. W. Bend Mut. Ins. Co.,, 2021 U.S. Dist. LEXIS 21298 (E.D. Mich. Feb. 4, 2021). 

    The Governor's order on COVID-19 forced the insured to close its salon. The insured tendered to West Bend for business interruption losses that occurred during the closure required under the Executive Order. Coverage was denied and suit was filed.

    The court found the insured had plausibly alleged that the COVID-19 particles infected the property, exposed staff and patrons, and prevented the insured from using its property for its intended purpose. This was enough to survive a motion to dismiss when the policy promised to cover "direct physical loss or damage" and left "Loss" and "damage" undefined. 

    The policy included a virus or bacterial exclusion, however, providing that West Bend "will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism . . ."  West Bend did not dispute that COVID-19 was a virus. However, in addition to being a virus, COVID-19 was also a "communicable disease" as defined in the policy. The insured argued a special grant of coverage for communicable diseases followed by an exclusion for virus or bacteria could not plausibly exist in the same policy. This contradictory language was ambiguous and was to be construed in favor of the insured. 

    The court found that the virus or bacteria exclusion was written to exclude "any virus" from the business income, extra expense, and civil authority coverages. Nevertheless, the virus and bacteria exclusion did not preclude the communicable disease coverage. The insured's claim under the communicable disease coverage survived the motion to dismiss.