Insurance Law Hawaii

More on Insurance Policy Assignments (Del Monte Fresh v. Fireman's Fund)

     Robert gave his initial impressions of this new Hawaii Supreme Court case last week. Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357, 183 P.3d 734 (2007). I add some thoughts and a summary below.  By way of disclaimer, my name appears in the decision as one of the attorneys representing Del Monte.

     It is not every day that a Hawaii appellate court issues decisions on insurance law, so this was a major event for insurance practitioners.  The decision is a victory for insurance companies and a blow to policy-holders, departing from the commonly held belief that Hawaii is one of the most policy-holder friendly jurisdictions in the country.

     At first blush, the reasoning in the opinion seems logical and makes sense.  Party A enters a contract with Party B; Party B assigns his rights to the contract to Party C, but never secures consent to the assignment from Party A.  Why should Party A be bound by contract to Party C when Party A never agreed to be so bound?

     On the other hand, Del Monte Corp., the named insured, sold all of its rights and liabilities to Del Monte Fresh, including the responsibility for remediating a Superfund site.  Under the assignment of the insurance policies, Del Monte Fresh did not increase the risk to the insurance companies, but absorbed the duty to clean the site.  Nevertheless, by merely changing the party responsible for the cleanup, the Del Monte opinion relieves the insurers from any coverage obligations.  Therefore, although the opinion seems logical, the result seems harsh.

     A summary follows:

     Del Monte Corporation was insured under polices issued by Fireman’s Fund and others prior to its sale of its Hawaii operations in 1989.  The policies contained no assignment clause requiring consent of the insurers to bind them to any assignment of the policies.   Through the sale, Del Monte Corp. transferred its assets and liabilities to Del Monte Fresh Produce (Hawaii), Inc.  Del Monte Fresh maintained that the transfer of all assets and liabilities assigned to it the right to claim and recover under Del Monte Corp.’s insurance policies in effect prior to the 1989 sale, notwithstanding the absence of an assignment provision in the policies.

     In 1994, the Del Monte pineapple plantation at Kunia, Hawaii was designated a Superfund site by the EPA.  An investigation revealed that a major spill of a soli fumigant had occurred in 1977, in addition to smaller spills over the years. Del Monte Fresh eventually entered an Administrative Consent Order with the EPA and agreed to undertake a remedial investigation and feasibility study.   Del Monte Fresh tendered the defense of the EPA claim to all liability insurers of the plantation since the 1940’s, but coverage was denied.

     Consequently, Del Monte Fresh sued its insurers in 1997.  In 2001, the trial court granted Del Monte Fresh’s cross-motion for summary judgment, holding that where a successor corporation seeks coverage and the coverage does not increase the risk to the insurer, by operation of law coverage extends to the claimant. Therefore, the insurers had a duty to defend and to indemnify Del Monte Fresh.

     The Hawaii Supreme Court reversed and entered summary judgment in favor of the insurers and against Del Monte Fresh.  Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 117 Haw. 357, 183 P.3d 734 (2007). The Court found a decision by the California Court of Appeal persuasive.  In General Accident Ins. Co. of America v. Superior Court, 64 Cal. Rptr. 2d 781 (Cal. Ct. App. 1997), the court held that a transfer of a policy to a successor corporation by operation of law was a violation of the basic principles of contract and was also bad public policy.  Similarly, under Hawaii law, every insurance policy is subject to the general rules of contract interpretation.  Therefore, the trial court erred in ruling that an assignment by operation of law is consistent with Hawaii’s rules governing construction of insurance policies.

     The policies had a no assignment clause that required the consent of the insurer to bind it to any assignment made by the insured.  Del Monte Corp. was the only named insured covered by the policies.  Del Monte Corp. had never obtained any consent from the insurers prior the 1989 assignment. Therefore, Del Monte Fresh was not an insured under the policies.

Insurance Policies Cannot Be Assigned Without Insurer Consent

The Hawaii Supreme Court just held yesterday that insurance policies with an “assignments require consent” clause cannot be assigned without the insurance company’s consent.  In Del Monte Fresh Produce (Hawaii), Inc. v. Fireman’s Fund Ins. Co. the Hawaii Supreme Court expressly held an assignment will not occur as a matter of law, but rather only by the policy’s term.

A concurrence, written by Justice Acoba and joined by Justice Duffy, would have reached the same result but concluded that “an explicit conveyance by contract is but one way to transfer insurance benefits.”  Thus, the concurrence would have held that an analysis of the insurance contract language itself is not always dispositive.

In my opinion (and I will attempt to expound upon this opinion later), the majority decision is deeply flawed.  As a pragmatic matter, it is virtually impossible to contact an insurance company several years after a policy is written.  Moreover, it is highly unlikely -- assuming you were to find a contact person -- that an insurance company would ever consent to an assignment.  Thus, this ruling effectively states that insurance policies can not be assigned. 

One has to wonder why the majority reached this conclusion.  An insurance company does not need to be insulated from pre-sale activities that it voluntarily and contractually agreed to cover.  On the other hand, this ruling will have a chilling effect on the sale or transfer of a company with any potential product or environmental liability regardless of the fact that the company had dutifully obtained insurance coverage for these risks. 

Big Island Hotel Sues Excess Carrier for Failure to Cover Earthquake Damage

     Today’s Honolulu Advertiser reports that Mauna Kea Beach Hotel on the Big Island has sued one of its excess carriers for failure to provide coverage for earthquake damage suffered in October 2006.  The story reports that three of the Hotel’s carriers have paid policy limits amounting to $30 million.  Affiliated FM Insurance Co., however, has refused coverage, arguing that $14.49 million in damages and business losses should be covered by the other policies and not by Affiliated’s policy.  The case was filed in State Court in November but was recently removed to Federal District Court.

Terrorism Risk Insurance Act Extended

     President Bush signed today H.R. 2761, the Terrorism Risk Insurance Program Reauthorization Act of 2007, preventing the expiration of the Act on December 31, 2007, and extending the federal insurance program for seven years.  The Act extends coverage to catastrophic acts of not only foreign terrorism but also domestic terrorism.

White House Mulls Over Extension of Terrorist Risk Insurance Act

     In our continuing coverage of Congress’ rush to beat the December 31, 2007 expiration date of the 2002 Terrorist Risk Insurance Act, we note the House on Tuesday bowed to pressure from the Senate and the White House to pass a less ambitious extension of the Act than it had previously passed.  Earlier House bills were for fifteen and seven years, and would have included group life insurance coverage and other new features.  The bill that passed Tuesday by a vote of 360-53 would expand coverage to domestic as well as foreign terrorist attacks, but would make few other new changes.

     Critics of the Act find it an unnecessary subsidy for insurance companies who can cover the risk of terrorism without government assistance.  Although the White House threatened to veto the bills previously passed by the House, the Administration backed the Senate’s limited extension of the Act.

Fifth Circuit Enforces Anti-Concurrent Causation Clause to Exclude Damage Caused by Flood

     Coverage of wind and flood damage under homeowners’ policies in the aftermath of Hurricane Katrina has been a hot topic of litigation.  Because Hawaii is also prone to wind and flood damage, cases addressing coverage under homeowners’ policies has relevance here.

     A recent case from the Fifth Circuit Court of Appeals, Tuepker v. State Farm Fire & Casualty Co., No. 06-61075 (5th Cir. Nov. 6, 2007), analyzed the impact of an anti-concurrent causation clause within the policy.  State Farm refused coverage under a homeowner’s policy for destruction of a home by Hurricane Katrina.  The policy contained an anti-concurrent causation clause (“ACC Clause”):

     We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events.  We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these.

     Perils excluded by the policy included “water damage,” defined to mean flood, surface water, waves, tidal water, tsunami, seiche, overflow of a body of water, or spray from any of these, all whether driven by wind or not.”

     The insureds sued, alleging their residence was completely destroyed by hurricane wind, rain and/or storm surge.  The complaint further alleged that the policy’s flood exclusion was not applicable.  State Farm moved to dismiss the complaint, arguing the plain language of the policy excluded water damage from hurricane and storm surge.

     The district court denied State Farm’s motion.  Although the court found the water damage exclusion valid, losses caused by both wind and rain raised an issue of proximate cause of the loss.  Utilizing the efficient proximate cause doctrine, the court held if the policy was inconsistent with this settled rule of law, the exclusion was invalid.  The court also determined the ACC Clause was ambiguous and ineffective to exclude damage proximately caused by wind or rain.

     On appeal, the Fifth Circuit first determined the water damage exclusion was valid.  In a prior case interpreting an almost identical water damage exclusion, the court found that “storm surge” was little more than a synonym for a tidal wave or wind-driven flood, both of which were perils excluded by State Farm’s policy.  See Leonard v. Nationwide Mutual Ins. Co., 499 F.3d 419, 428 (5th Cir. 2007).  Therefore, the storm surge that damaged the insureds’ home was a peril that was unambiguously excluded from coverage under the policy.

     The court then turned to the ACC Clause, determining it was unambiguous and enforceable.  Any damage caused exclusively by a non-excluded peril or event such as wind, not concurrently or sequentially with water damage, is covered by the policy, while all damage caused by water or by wind acting concurrently or sequentially with water, is excluded.  Therefore, the ACC Clause in combination with the water damage exclusion provided that indivisible damage caused by both excluded perils and covered perils or other causes was not covered.  The court cautioned however, if wind blows off the roof of the house, the loss of the roof is not excluded merely because a subsequent storm surge later completely destroys the entire remainder of the structure; such roof loss did occur in the absence of any listed excluded peril.

     Finally, the court considered whether the ACC Clause was unenforceable because it conflicted with the efficient proximate cause doctrine.  Under this doctrine, when a loss is caused by the combination of both covered and uncovered perils, the loss is fully covered by the insurance policy of the covered risk proximately caused the loss.  Therefore, if the policy covered wind damage but excluded water damage, the insured would be covered if it could show that the wind proximately or efficiently cause the loss, notwithstanding that there were other excluded causes contributing to the loss like flooding.

     Here, however, the ACC Clause overrode the efficient proximate cause doctrine.  Therefore, the district court’s holding that the ACC Clause was invalid to the extent it conflicted with the efficient proximate cause doctrine was reversed.

Federal Court Determines Hawaii Law Supports Reimbursement of Defense Costs Where No Duty to Defend

     In February, 2006, Federal District Court Judge Helen Gillmor granted the insurer’s Motion for Partial Summary Judgment, determining there was no duty to defend.  Scottdale Ins. Co. v. Sullivan Properties, Inc., 2006 U.S. Dist. LEXIS 11582 (D. Haw., Feb. 27, 2006).   The decision invited Scottsdale move for reimbursement of defense costs.

     Scottsdale’s subsequent motion for summary judgment on the reimbursement issue was granted.   Scottdale Ins. Co. v. Sullivan Properties, Inc., 2007 U.S. Dist. LEXIS 57021 (D. Haw., Aug. 1, 2007).  Judge Gillmor felt certifying the question to the Hawaii Supreme Court was unnecessary.  Review of Hawaii case law convinced her that Hawaii courts would recognize the right of insurers to recoup defense costs when defending under a reservation of rights letter which expressly reserves the insurers’ right to reimbursement. The decision recognizes while there is no Hawaii case law addressing the precise issue, the concepts applied by courts in allowing insurers to recoup defense costs were well established in Hawaii law.

     Hawaii law recognizes the doctrine of unjust enrichment applies where a plaintiff proves it has conferred a benefit upon the opposing party and that the retention of the benefit could be unjust.  An insured is unjustly enriched by an insurer’s payment of defense costs when the insurer never had a duty to defend in the first place.

     Judge Gillmor recognized Hawaii courts follow California case law on insurance coverage issues.  California has long recognized the insurers’ right to reimbursement in, for example, Buss v. Superior Court of Los Angeles, 65 Cal. Rptr. 2d 366 (Cal. 1997) and Scottsdale Ins. Co. v. MV Transportation, 31 Cal. Rptr. 3d 147 (Cal. 2005).  Courts in other jurisdictions have also recognized the insurers’ right to reimbursement.

     Therefore, Scottsdale was entitled to reimbursement of costs and expenses incurred in defending the insured in the underlying case.  The insured’s motion to certify the question to the Hawaii Supreme Court was denied because Judge Gillmor determined Hawaii courts have applied the equitable principles of quasi-contract and unjust enrichment in a matter consistent with reimbursement here.

     Interestingly, another Federal District Court Judge, Judge Mollway seriously questioned the right to reimbursement under Hawaii law in Executive Risk Indemnity, Inc. v. Pacific Educ. Services, Inc., 451 F.Supp.2d 1147 (D. Haw. 2006).  Judge Mollway denied without prejudice a motion for reimbursement of defense costs because the insurer had failed to convince her that Hawaii law supported reimbursement.

Attorneys’ Fees and Bad Faith

Practitioners have noticed, and have been puzzled by, a schism in the Supreme Court of Hawai`i’s rulings on attorneys’ fees in bad faith actions.  At least one case held that a bad faith action was in the nature of assumpsit and, thus, awarded fees to the insurer from the insured.  Six months later, another case, without discussing the first case, came to the opposite conclusion.

Adding more flame to the fire, the Hawai`i Supreme Court recently denied cert in Jou v. Argonaut Ins. Co., 2007 Haw. LEXIS 367 (2007).  The ICA granted attorneys’ fees in a claim for bad faith claim, tortious interference with a prospective business advantage claim, and statutory tort claim under HRS § 663-1 (Supp. 1997).  In a dissent to the denial of the cert claim, Justice Acoba concluded that all of the claims sounded in tort, instead of assumpsit.

Obviously a denial of cert is not conclusive, but the Supreme Court’s refusal to address this issue only cautions an insured to be very careful before alleging bad faith against an insurer.

Homeowner’s Policy Limits Coverage for Additional Insureds to Vicarious Liability

     In Garcia v. Federal Ins. Co., Case No. SC06-2524 (Fla., Oct. 25, 2007), the Florida Supreme Court recently analyzed certified questions from the Eleventh Circuit regarding coverage for an additional insured under a homeowner’s policy.  The issue was whether the policy’s coverage of the additional insured was limited to vicarious liability for the acts of the named insured.

     Garcia was employed by Anderson.  With Anderson’s permission, Garcia drove Anderson’s vehicle to the supermarket where she struck a pedestrian.  The pedestrian sued Garcia and Anderson, alleging they were each independently negligent for allowing the brake pedal to wear down to bare metal, causing Garcia’s foot to slip.

     Garcia sought coverage under Anderson’s homeowner’s policy, which defined a covered person as “any other person or organization with respect to liability because of acts or omissions of you or a family member.”  Federal denied the claim, contending the policy only covered individuals who became vicariously liable for the acts or omissions of the name insured.  Because the victim sued Garcia for her own negligent acts, not for any acts or omissions by Anderson, Federal concluded Garcia was not an additional insured under the policy.

     The Florida Supreme Court determined the phrase “any other person with respect to liability because of acts or omissions of the name insured” was unambiguous and limited an additional insured’s coverage to vicarious liability.  The phrase “because of” meant an additional insured was only entitled to coverage concerning liability that was caused by or occurred by reason of acts or omissions of the named insured.  Because the accident victim sued Garcia for her own negligence in failing to maintain the brake pedal, and did not allege that Garcia was liable for Anderson’s acts or omissions, Garcia was not entitled to coverage.

     Having addressed the certified questions, the case was returned to the Eleventh Circuit, which affirmed the District Court’s decision that Garcia was not covered under the policy.  See Garcia v. Federal Ins. Co., 2007 U.S. App. LEXIS 27975 (11th Cir. Dec. 4, 2007).

Available here: garci001.PDF

House Passes Bill Extending Terrorism Risk Insurance Act

     Last week, we reported Congress was considering extending the Terrorism Risk Insurance Act of 2002, set to expire on December 31, 2007.   Today, the House approved a bill 303-116 to extend the Act and expand coverage despite the threat of a presidential veto.  While the Senate bill merely extends the existing program for seven years, the House bill adds group life insurance and a reset provision.  The reset would provide lower deductibles for insurers who agree to write terrorism coverage for areas that have experienced terrorist attacks, and would lower the levels at which the government would step in to assist insurers.