Insurance Law Hawaii

Denial of Bad Faith Claims Reversed and Remanded

    The Kentucky Supreme Court reversed the court of appeals' affirmance of the trial court's denial of bad faith claims. Nichols v. Zurich Am. Ins. Co., 630 S.W. 3d 683 (Ky. 2021).

    Miller Pipeline Corporation had a commercial fleet policy with Zurich. The policy provided UIM coverage of $1,000,000. 

    Miller's employee, James Nichols, was severely injury on June 4, ,2002, in an automobile accident. For over two years and eight months, Nichols and his counsel negotiated with Zurich over UIM coverage. Seven Zurich employees examined the policy terms and acknowledged the policy included UIM coverage with $1,000,000 limits. Nichols relied on this representation when settling with the tortfeasor. 

    In February 2005, Zurich, through adjuster David Gusman, advised Nichols' that the policy did not include UMI coverage. Zurich's documents, however, showed that the underwriter produced a copy of the policy showing UIM coverage. The underwriter refused to comply with Gusman's request for an endorsement showing no UIM coverage. Zurich eventually produced an endorsement "effective 4/1/02" which was created in September 2005. The endorsement noted no additional premium was charged and no return of premium, and the second page provided "No Change in Premium," suggesting no UIM coverage.

    In October 2005, Nichols filed suit against Zurich to collect under the UIM provision. Initially, Zurich defended on the grounds that the endorsement explicitly excluded UIM coverage and filed a motion for summary judgment on that basis. The trial court denied the motion because, among other reasons, Zurich never made any assertion of lack of UIM coverage until almost three years after the accident and while the policy set forth effective premiums for UIM coverage, the change endorsement made no mention of premium refund. 

    Almost three years later, Nichols filed a motion for summary judgment that the UIM coverage was included. Zurich filed a cross motion and changed strategy, asserting for the first time that the policy's UIM coverage was issued due to a mutual mistake and should be reformed. The trial court allowed Zurich to amend its answer to allege mutual mistake and to request reformation. The trial court then granted Zurich's motion for summary judgment. The court of appeals affirmed.

    The supreme court reversed, holding that mutual mistake was not available as ground to reform the policy since no facts indicated that Zurich was aware of Miller's desire to exclude optional coverages, such as UIM. The supreme court held that Nichols was entitled to partial summary judgment on the issue of UIM coverage.

    On remand, the trial court granted Nichols' motion to amend his compliant to assert bad faith. Zurich then settled Nichols' UIM claim for the policy limits of $1,000,000. 

    After discovery, the parties filed cross motions for summary judgment on the bad faith claim. The trial court granted Zurich's motion and the court of appeals affirmed.

    The supreme court found that Nichols presented evidence from which a jury could determine that Zurich did not act reasonably in denying his claim. Further, there was evidence that Zurich acted with reckless disregard. For four years after the accident, Zurich failed to investigate, negotiate, or otherwise meaningfully interact with Nichols. Thereafter, Zurich continued to delay and litigate despite having no legal foundation upon which to base its case, only fulfilling its contractual obligations nine years after Nichols' accident. 

    The bad faith claim was remanded to the trial court for further proceedings. 

    

Late Notice Kills Insured's Claim for Damage Due to Hurricane

    The insurer's motion for summary judgment was granted based upon the insured's late notice nearly two years after a hurricane caused property damage. Ramirez v. Scottsdale Ins. Co., 2021 U.S. Dist. LEXIS 209716 (S.D. Fla. Oct. 29, 2021).

    Plaintiff alleged he suffered property loss due to wind and water damage from Hurricane Irma on September 10, 2017. The roof, exterior, and interior of the home were damaged. 

    On May 20, 2019, twenty months after the hurricane, plaintiff first notified Scottsdale of his claim for damages. An adjuster inspected and observed wind, wear and tear, and deterioration damage to the roof tile, as well as interior water damage to portions of the home. The claim was denied based upon wind, wear and tear, and deterioration exclusions in the policy.

    Plaintiff filed suit. Scottsdale moved for summary judgment because plaintiff failed to provide "prompt notice" as required by the policy. Plaintiff conceded the notice was untimely, but argued Scottsdale suffered no prejudice because it was able to inspect the property. 

    The court disagreed with plaintiff's argument. Under Florida law, where the policy required notice "as soon as practicable," the clause is breached by a failure to notify the insurer for a period of more than one year. When the undisputed factual record establishes notice is so late that no reasonable juror could find it timely, Florida courts will deem the notice untimely as a matter of law. 

    Plaintiff argued Scottsdale was not prejudiced because it had the opportunity to inspect the property. This at least created an issued of fact for the factfinder. But plaintiff failed to point to anything in the record to support this argument. 

    Therefore, Scottsdale's motion was granted.

   

Law Firm's Business Income, Civil Authority Claim Due to Hurricanes Survives Insurer's Motion for Summary Judgment

    The insurer was unsuccessful in moving for summary judgment on the insured's claim for loss of business income and civil authority coverage due to losses caused by two hurricanes. Townsley v. Ohio Security Ins. Co., 2021 U.S. Dist. LEXIS 202698 (W.D. La. Oct. 20, 2021).

    Hurricane Laura struck southeast Louisiana on August 27, 2020 and Hurricane Delta made landfall in the same area on October 9, 2020. Both hurricanes caused property damage and an interruption of business for the insured law firm. Power outages and mandatory evacuation orders caused by both storms created a loss of income for the law firm. Ohio Security denied coverage under the business income, extra expense, and civil authority provisions. 

    The law firm sued and Ohio Security moved for summary judgment. From the undisputed facts, the court could not determine the law firm's entitlement to business income and extra expense coverage, so the motion was denied for these claims. 

    The law firm argued that the mandatory evacuation orders for both storms meant it was entitled to coverage under Civil Authority provisions. The coverage began 72 hours after the Civil Authority action was imposed. The law firm was entitled to Civil Authority Coverage for Hurricane Laura because the August 27, 2020 order was extended until September 11, 2020. The orders for Hurricane Delta, however, did not meet the 72 hour requirement because there was no extension issued. 

    

Insurer's Late Notice Defense Fails on Summary Judgment

    The insurer's motion for summary judgment to dismiss the claim because the insurer did not provide notice "as soon as practicable" was denied. Vintage Hospitality Group LLC v. Nat'l Trust Ins. Co., 2021 U.S. Dist. LEXIS 192651 (M.D. Ga. Oct. 6, 2021). 

        Vintage owned hotels, one of which was struck by a severe hailstorm on July 21, 2018. Vintage was not aware of roof damage until two months after the storm, and did not make the connection between the hailstorm and roof damage until February 2020, when it reported the damage to National. The claim was denied because it was not reported "as soon as practicable" as required by the policy.

    Vintage sued and National moved for summary judgment. 

    Vintage did not notice the leaks until September 2018. The focus was on fixing the leaks, and connection to the hailstorm did not register. The leaks persisted over the next year and a half. A construction company was called in to evaluate the leaking roof. The construction company advised that the roof had experienced previous hail damage which was causing the leaks. At this point, Vintage connected the damage to the hailstorm. A claim was promptly submitted to National, which denied the claim.

    The National policy did not place a hard deadline for reporting a claim. Georgia law interpreted the phrase "as soon as practicable" as within a reasonable time considering all the circumstances. Vintage reported the claim within a few days of being informed by the roofing contractor that the leaky roof was caused by previous hail damage.

    The court found there was a genuine factual dispute as to whether Vintage gave notice as soon as practicable. The court denied National's motion. 

Indemnity Provision Prevails Over "Other Insurance" Clause

    The Second Circuit predicted that the New York appellate courts would find the contractual indemnity provision prevailed over the application of an "other insurance" provisions. Cent. Sur. Co. v. Metro. Transit Auth., 2021 U.S. App. LEXIS 29860 (2nd Cir. Oct. 5,2021). 

    Long Island Railroad (LIRR) contracted with general contractor Rukh Enterprises, Inc. to complete a railroad bridge lead paint removal and repainting project on Metropolitan Transit Authority property. Rukh hired subcontractor, East Coast Painting & Maintenance to complete certain lead-related work on the project. 

    An employee of East Coast suffered an injury while working on the project. The employee sued LIRR and Rukh. A settlement in the underlying case was reached, implicating three of four policies - Admiral (primary for LIRR), Arch (CGL for Rukh), and Harleysville (primary for East Coast). Century Surety (excess liability for Rukh) did not contribute to the settlement and disclaimed all coverage.

    Century Surety filed for declaratory judgment that it had no duty to defend or indemnify. The district granted Century Surety's motion for summary judgment, concluding that based on the language contained on the "other insurance" provision in its policy, the policy was an excess policy that was not liable to tender payment until the other available policies, including the Admiral policy, had tendered payments pursuant to their policy limits.

    On appeal, the other insurers argued that the indemnity agreement between Rukh and LIRR should control and Century Surety should tender payment and exhaust its policy limits ahead of Admiral. The appellate court agreed. The Second Circuit predicted that the New York Court of Appeals would find that an indemnity agreement in the underlying contract between the insureds governed over the terms of an insurance policy concerning priority of coverage.

    Therefore, the judgment of the district court was reversed.

Tenth Circuit Finds Appraisal Can Decide Causation of Loss Under Colorado Law

    The Tenth Circuit determined that the Colorado Supreme Court would agree with other state courts that appraisers can decide the causation of a loss. Bonbeck Parker, LLC v. The Travelers Indem. Co. of Am., 2021 U.S. App. LEXIS 29607 (10th Cir. Oct. 1, 2021). 

    A hailstorm damaged three buildings owned by BonBeck. A claim was submitted to Travelers under BonBeck's commercial property policy. Travelers acknowledged that some hail damage occurred to all the buildings except for the roofs. Travelers paid $34,200 for damage to the buildings. Coverage for the roof damage was denied because it resulted not from the hail damage but from uncovered events like wear and tear, deterioration, and improperly installation. 

    BonBeck requested an appraisal. Travelers insisted that the appraisal would only determine the amount of loss of covered claims. BonBeck rejected these conditions and Travelers filed suit.

    On the first round of summary judgment motions, the district court sided with BonBeck, concluding that the appraisal provision authorized the panel to make cause-of-loss determinations. The appraisal then took place and the panel estimated the total loss from hail damage to be about $216,000. Travelers paid BonBeck the appraisal award, minus the $34,000 it had already paid.

    In a second round of motions for summary judgment, the court again agreed with BonBeck that Travelers had breached the policy by not agreeing to an appraisal. The district court awarded BonBeck nominal damages of $1 and statutory interest of $36,142.63. Travelers appealed.

    The appraisal provision stated, in part,

If we and you disagree on the value of the property, the amount of Net Income and operating expense, or the amount of loss, either may make written demand for an appraisal of the loss. . .

If there is an appraisal, we will still retain our right to deny the claim.

    The district court focused on the first sentence, which stated a party could request an appraisal based on "the amount of loss." The district court determined that "the amount of loss" encompassed causation disputes. Dictionary definitions of "loss" all included a causation component, making clear that "loss" refers to damage resulting from a covered event.

    The Tenth Circuit concluded that the Colorado Supreme Court would join other courts in recognizing that in the insurance context, the ordinary meaning of the phrase "amount of loss" encompassed causation.

    Travelers argued that allowing the appraisal panel to determine what caused BonBeck's damage prevented Travelers from later denying coverage based on its view that something other than the hailstorm caused the damage. The court disagreed. The last sentence  of the appraisal provision covered Travelers' right to deny a claim after an appraisal. For example, Travelers could still deny coverage for failure of the insured to provide prompt notice or to cooperate.

    Therefore, the Tenth Circuit affirmed the grant of summary judgment to BonBeck.

    Thanks to Robert Joslin, Hawaii Public Adjusters, for flagging this case. 

     

Insurer's Motion to Dismiss COVID-19 Business Interruption Claim Denied

    Determining that government shutdown orders during the pandemic were a physical cause of loss and finding the virus exclusion ambiguous, the court denied the insurer's motion to dismiss. Risinger Holdings v. Sentinel Ins. Co., 2021 U.S. Dist. LEXIS 192474 (D. E.D. Texas Sept. 30, 2021).

    Risinger owed several orthodontic practices. It held a policy issued by Sentinel which provided business interruption coverage. The policy also included a virus exclusion, which barred coverage for damage caused by "fungi, wet rot, dry rot, bacteria or virus." Sentinel argued this exclusion barred coverage for business interruption losses caused by government lockdowns during the COVID-19 pandemic.

    The court noted "virus" appeared in different parts of the policy. Another exclusion barred coverage for destruction or corruption of electronic data caused by a virus, malicious code or similar instruction introduced into a computer system. Therefore, this exclusion defined the term "virus" as "malicious code or similar instruction." "Virus" was not defined elsewhere in the policy. This gave rise to at least a measure of ambiguity.

   Elsewhere, the policy had another exclusion for the enforcement of any ordinance or law which required the demolition repair, replacement, etc., of property due to the presence of fungi, wet or dry rot, bacteria or virus. This meant the term virus was susceptible to at least three different interpretations. It could mean: (1) "malicious code or similar instruction"; or (2) a subcategory of virus capable of causing structural or mechanical damage or failure; or (3) a subcategory of virus capable of inducing physical distress, illness, or disease. Therefore, the policy was ambiguous and had to construed in the insured's favor. Consequently, the exclusion did not bar coverage.

    The court next considered the policy provision requiring "direct physical loss." Here, the policy defined the scope of coverage by distinguishing between "direct physical loss of or physical damage to" covered property. The disjunctive "or" in the phrase meant that "physical loss" must cover something different from "physical damage." Sentinel did not point to anything in the policy that clarified the term "physical loss." Thus, the "physical loss" component was ambiguous.

    Risinger may have suffered direct physical loss due to the government shutdown orders by being deprived of the use of the physical space of its covered property, or alternately, because of the severe material losses it endured when it was forcibly excluded from its businesses. Accordingly, the policy's coverage provision applied to Risinger's claims for business losses due to the government shutdown orders. Sentinel's motion to dismiss was denied.

    

Illinois Supreme Court Rules Labor Costs Not Depreciated to Determine Actual Cash Value

    The Illinois Supreme Court determined that a homeowner insurer may not depreciate labor costs in calculating actual cash value (ACV) after a loss under the policy. Sproull v. State Farm Fire and Casualty Co., 2021 Ill. LEXIS 619 (Ill. Sept. 23, 2021). 

    Plaintiff was insured under a homeowner's policy that provided replacement cost coverage for structural damage. Under the policy, the insured would initially receive an ACV payment but then could receive replacement cost value (RCV) if repairs or replacement were completed within two years and the insurer was timely notified. The policy did not define "actual cash value."

    Plaintiff suffered wind damage to his residence and timely submitted a property damage claim to State Farm. The adjuster determined that the building sustained a loss with RCV of $1711.54. In calculating ACV, State Farm began with the RCV and then subtracted plaintiff's $1000 deductible and an additional $394.36, including taxes, for depreciation. Plaintiff thus received an ACV payment of $317.18. Plaintiff claimed that he was underpaid on his ACV claim because State Farm depreciated labor, which is intangible and thus not subject to wear, tear, and obsolescence. Further, labor should not have been depreciated because it was not susceptible to aging or wearing and its value did not diminish over time.

    Plaintiff alleged that State Farm concealed its practice of depreciating labor from its policyholders in several different ways. First, State Farm did not state in its written estimates that Xactimate software was set to depreciate nontangible items such as labor. Second, State Farm did not separate labor and materials in the estimates provided to policyholders. Third, for obvious labor-only charges such as debris removal or roof tear-off charges, State Farm did not depreciate labor. Plaintiff alleged that State Farm did this to help avoid detection of labor depreciation in other line items. In all, the more the ACV payment was lowered, the less likely it was that the policyholder could make up the difference between ACV and RCV and seek reimbursement later.

    Plaintiff sued and State Farm moved to dismiss. The trial court denied the motion, finding the policy was ambiguous because it did not define the term "actual cash value." The appellate court affirmed.

    On appeal, the Supreme Court noted that courts that adopt the view that labor can be depreciated generally (1) find the term "actual cash value" unambiguous, (2) find that materials and labor form an integrated product and that it is not logical to separate labor and materials when applying depreciation, and (3) believe that failing to depreciate labor overcompensates the insured. 

    The court determined that the policy was ambiguous on the question of labor depreciation and construed it in favor of the insured's reasonable interpretation. Labor was not logically depreciable, as it did not lose value over time due to wear and tear. Materials deteriorated with time, but labor did not. Labor was a fixed cost that was not subject to wear and tear, deterioration, or obsolescence. 

No Coverage for Cyber Theft

    The court determined that the insured's policy did not cover the theft of funds orchestrated by instructions from fraudsters. Star Title Partners of Palm Harbor, LLC v. Illinois Union Ins. Co., 2021 U.S. Dist. LEXIS 193001 (M.D. Fla. Sept. 1, 2021).

    Star Title was a title company retained by Neil Woods to act as the settlement agent for the sale of his home. Star Title's duties included receipt and distribution of the sale proceeds. Star Title used a processor and a closer for each closing. The processor cleared title for the property, while the closer distributed funds at the time of closing. The practice of segregating the closing process did not include nay steps designed to verify the authenticity of the wire transfer instructions.

    The processor contacted Woods' lender, CMS, for payoff information and was told to submit her requests by email. An email was sent requesting a "Mortgage Loan Payoff Letter" in anticipation of a closing scheduled for August 9, 2019. The processor provided the name of the sellers/mortgagors, the address of the property, the loan number, and the closing date. 

    In response, the processor received an email purportedly from a CMS Payoff Representative with instructions for the transfer of payoff funds. That same day, Star Title received a second copy of the Payoff Statement sent via facsimile purportedly from "Capital Mortgage of Texas." The processor determined that the Payoff Statement was authentic and that no additional steps were required to verify the authenticity of the Payoff Statement. 

    The day of the closing, the processor initialed the transfer of payoff funds from Star Title's escrow account pursuant to the instructions on the Payoff Statement. The closer then approved the wire transfer in accordance with Star Title's two-person authentication protocol, which required the closer to review the wire information to confirm that it matched the information in the paper file. The closer approved the wire transfer in the amount of $180,902 to the referenced account. 

    After investigation, Star Title determined that the wire instructions were fraudulent. Star Title tendered its claim to Illinois Union pursuant to its Cyber Protection Package Policy. The policy included an endorsement for cybercrime which provided coverage for Deceptive Transfer Fraud. Illinois Union denied coverage. Star Title sued and Illinois Union moved for summary judgment.

    The policy required Star Title to prove that (1) the perpetrator purported to be an employee, customer, client or vender; and (2) the authenticity of such transfer request was verified in accordance with Star Title's internal procedures. The undisputed facts demonstrated that Star Title could not establish either of these requirements because CMS was not Star Title's employee, customer, client, or vendor and Star Title made no attempt to verify the authenticity of the transfer request.

    Summary judgment was awarded to Illinois Union.

Montana Federal Court Upholds Application of Anti-Concurrent Causation Clause

    Interpreting Montana law, the federal district court found that the policy's anti-concurrent causation clause prevented coverage for the insured's damaged home. Ward v. Safeco Ins. Co. of Am., 2021 U.S. Dist. LEXIS 149051 (D. Mont. Aug. 9, 2021).

    Plaintiff was advised by her tenants that water was bubbling up from the ground. It was determined that water was leaking from a main pipe serving the property. Subsequently, this old pipe was abandoned, left in the ground, and replaced with a new pipe in a new path with new excavation. Nevertheless, the insured reported the incident to her agent under her Landlord Protection Policy issued by Safeco, but reported there was no damage to the property. 

    Two months later, it was discovered a pipe burst again. The insured called her agent, who maintained the loss would not be covered, but agreed to submit a claim to Safeco. Safeco hired an inspector. A report stated that a portion of cracks found in the concrete perimeter of the home were not new and that the shape of the structure on which the house sat could explain their presence. The report noted that new cracks in the foundation could have been caused by a lack of care to make sure that the foundation was sufficient supported by consolidated soil during the excavation of the new water line. Based upon this report, Safeco denied coverage based upon the earth movement and water damage exclusions.

    The insured sued and Safeco moved for summary judgment. The insured argued that the loss was covered pursuant to Montana's proximate cause doctrine, which mandated coverage for excluded events when those events were caused by a covered peril. The policy, however, had an anti-concurrent causation clause that Safeco argued defeated the insured's argument. The clause stated that it would not cover "loss caused directly or indirectly by way of the following exclusions regardless of any other cause or event construing concurrently or in any sequence to the loss." Prior Montana case law had upheld a similar anti-concurrent causation clause. 

    The insured's bad faith claim was also rejected and summary judgment was granted to Safeco.