Insurance Law Hawaii

Insurer's Suit Challenging Hawaii's Commissioner is Premature

     In Hawaii Management Alliance Assoc. v. Schmidt, 2008 U.S. Dist. LEXIS 69995 (D. Haw. Sept. 5, 2008), the the insured ("HMAA"), a mutual benefit society, challenged a memorandum issued by the Hawaii Insurance Commissioner which stated granting a plan administrator discretionary authority so as to deprive the insured of a de novo appeal was an unfair or deceptive insurance practice. 

     The plan provided HMAA had sole discretion to determine all questions of eligibility.  The Commissioner informed HMAA that is use of the discretionary clause was an unfair or deceptive practice in the business of insurance.  The Commissioner threatened that if HMAA did not remove the clause from its service agreements, the Insurance Division would take "formal action."  When the parties could not agree on acceptable language, HMAA sued, alleging that by issuing the memorandum, the Commissioner improperly prohibited the use of discretionary clauses.  HMAA moved for summary judgment, arguing the memorandum was pre-empted by ERISA and that the memorandum was promulgated as a rule in violation of the Hawaii Administrative Procedure Act.

     The court determined it had no jurisdiction over the claims raised by HMAA because they were premature.  First, the memorandum was not a definitive statement of the Insurance Division's position.  It was possible the Commissioner could decide not to take any action against HMAA.  It was also possible that after HMAA stated its case, the Commissioner could agree the used of the discretionary clause was not an unfair or deception act or practice.

     In addition, the Commissioner had not taken any final action.  If the Commissioner believed HMAA was using the discretionary clause in violation of the law, he would first have to afford an opportunity to be heard before action could be taken against HMAA.  Therefore, the memorandum did not have a direct and immediate effect on HMAA.  Consequently, the court did not have jurisdiction to address the merits of HMAA's claims regarding ERISA. 

Attorney Fees Denied Despite Insured's Successful Suit Securing Coverage

     The simple issue in Mohnkern v. The Professional Ins. Co. was: does a Florida statute automatically award attorneys' fees upon a successful outcome by the beneficiary/insured?  Or does the statute require the insurer to have wrongfully caused the insured/beneficiary to resort to litigation before attorneys' fees can be awarded?

      The Florida attorneys' fee statute reads, in part, "upon rendition of a judgment . . . against an insurer and in favor of any . . . named beneficiary under a policy, the trial court . . . shall adjudge . . . in favor of the . . . beneficiary a reasonable sum as fees or compensation for the beneficiary's attorney."  Fla. Stat. 627.428.  This statute is not too far off from the Hawaii statute that awards fees to successful policyholders: "Where an insurer has contested its liability under a policy and is ordered by the courts to pay benefits under the policy, the policyholder . . . shall be awarded reasonable attorney's fees and the costs of suit, in addition to the benefits under the policy."  Haw. Rev. Stat. 431:10-242.

     The facts in Mohnkern are a bit convoluted, so bear with me.  Professional Insurance Company ("PIC") issued a life insurance policy to Blacknell in the amount of $100,000.  When Blacknell had health problems, he sold the policy in return for a sum less than policy limits. 

     Meanwhile, Mohnkern invested $100,000 with Alpha Capital Group to purchase a life insurance policy sold by the policyholder, known as a viatical settlement.  She was later assigned the Blacknell policy in exchange for $49,995 of her initial $100,000 investment. 

     Alpha subsequently sued its escrow agent, alleging misappropriation of funds.  The federal district court appointed a receiver, who was instructed to satisfy claims of creditors and investors, including all interests in insurance policies funded by investors which were in the name of the defendant escrow agent. 

     Blacknell died in November 2000.  Mohnkern submitted her claim on the Blacknell policy to PIC.  PIC informed Mohnkern the policy was wrapped up in the receivership in the Alpha lawsuit.  Consequently,  there was a delay in making payment as the receiver filed a motion for directions from the court. Mohnkern intervened in the Alpha suit to get the funds released.  Her suit was dismissed, but the Sixth Circuit reversed and remanded for a hearing on the ownership of the Blacknell policy proceeds.  Mohnkern and the receiver finally settled in December 2005, when Mohnkern received $105,000. 

     Mohnkern then sued PIC for delay in payment and for attorney fees under the Florida statute.  The district court denied fees.  Mohnkern argued on appeal that because she was forced to litigate her entitlement to payment under the policy, the attorney fee statute was automatically triggered.  The Sixth Circuit agreed the statute's purpose was to place the insured where she would have been if the insurer had seasonably paid the claim without forcing the insured to file suit and incur fees.  Here, however, the insurer did not contest her valid claim.  Instead, PIC acted pursuant to a court order when it paid the Blacknell proceeds into the receiver's escrow account instead of to Mohnkern.  Because the insurer was without power to resolve Mohnkern's claim, the attorneys' fee statute did not apply.

Tulane University Seeks Coverage for Katrina Damage

     Three years after Katrina, Tulane University continues to be mired in litigation seeking coverage under its property policies for damage inflicted by the hurricane.  In Ace American Ins. Co. v. Administrators of the Tulane Educational Fund, 2008 U.S. Dist. LEXIS 66299 (E.D. La. Aug. 29, 2008), the court decided several coverage issues, some in favor of Tulane, some in favor of its insurer.

     Prior to Katrina, Tulane had four layers of coverage providing $450 million in coverage limits. Ace American's all risk policy was the final layer of excess coverage which applied in excess of the $350 million limits provided by the other layers.  Tulane recovered from all insurers below Ace American.  Tulane sued Ace American, claiming it has sustained damages in excess of $350 million. 

     On its motion for summary judgment, Ace American argued Tulane had failed to allocate its losses between covered wind losses and excluded flood and mold-related losses.  Although this was Tulane's burden, it was still in the process of investigating in order to segregate its damages.  Accordingly, the court found Ace American's motion on the grounds of Tulane's failure to allocate was premature. 

     Next, the court considered whether the policy flood exclusion included damage caused by water which backed up through sewers or drains.  Although Ace American's policy did not exclude water backed up through sewers or drains in its definition of flood, Ace American's policy incorporated the terms of the underlying policies.  One of those policies did exclude damage caused by water including water backed up from a sewer or drain.  Thus, the Ace American policy excluded these damages.

     Finally, the court considered the mold exclusion.  Although the policy excluded damage caused by mold, Tulane argued elsewhere in the policy contaminants or pollutants driven by wind were covered.  The policy defined the terms "contaminants" and "pollutants" to include "fungi", which Tulane argued included damage caused by mold.  The court disagreed, however.  The fact that mold damage may not be excluded under one particular exclusion did not mean that it could not be excluded under a separate exclusion. The exclusion addressing mold meant the policy excluded damage caused by mold, even if it was caused by a windstorm.

ICA Oral Argument on Coverage Issues

An oral argument on coverage issues is scheduled before the ICA on November 12, 2008.  The brief description of the case (generally drafted by an ICA law clerk) states:

Chezray Hayes, a minor, died when the aircraft he was piloting crashed on Molokai.  His parents, Defendants-Appellees Mitchell and Natalie Hayes (the Hayes), filed a wrongful death action against the plane's owner, Plaintiffs-Appellees George's Aviation Services Inc., George Hanzawa, and Jennifer Oka (collectively, George's Aviation).  George's Aviation filed a declaratory judgment action against its insurer, Defendant-Appellant XL Specialty Insurance Company (XL), seeking a declaration that the total amount of coverage available under XL's policy was $300,000 ($100,000 each for claims by each of the Hayes, individually, and $100,000 for the Estate of Chezray Hayes).  On three summary judgment motions, the Second Circuit Court ruled in favor of George's Aviation and the Hayes and against XL.  XL timely filed this appeal.

On appeal, XL argues that the total amount of coverage available is limited by the "each person" limitation of $100,000 because the Hayes' claims are derivative of the Estate of Chezray Hayes, and not entitled to separate policy limits.  The appellees argue, inter alia, that XL's derivative claim analysis should be rejected, negligent infliction of emotional distress is an independent tort entitled to a separate policy limit, and XL's policy was ambiguous.

We hope to be there and will give you a blow-by-blow description (perhaps from our shiny iPhone?).  Thanks to the Supreme Court of Hawai`i Blog for posting about this upcoming oral argument.

Is Damage From Hurricane Ike Caused by Flood or Wind?

     The battle has begun on whether the Hurricane Ike's damage to the Texas coast was a result of flood or wind.  Here is an interesting post from a Texas blogger suggesting that the litigation spawned by Hurricane Katrina may continue in the wake of Hurricane Ike. 

     Since the storm, Texas legislators have suggested that the Texas Windstorm Insurance Association pay claims for damages resulting from storm surge.  This Association has taken on coverage for many coastal homeowners after private insurers withdrew from the market.  The Texas post recognizes most homeowners' policies exclude damages caused by flood or storm surge.  Further, the post acknowledges the Fifth Circuit's decision in Broussard v. State Farm Fire & Cas. Co., 523 F.3d 618 (5th Cir. 2008) has been there, done that.  Although the District Court in Broussard determined that because State Farm could not establish what portion of the loss was attributable to the excluded damage caused by flood, the homeowners were entitled to Judgment as a Matter of Law, and awarded damages.  The Fifth Circuit reversed and remanded with instructions on the parties' burden of proof.

     The Fifth Circuit, which includes Texas, has developed a body of law on the flood/wind dichotomy in homeowners' policies.  Although it would seem many of the issues decided after Hurricane Katrina would apply to coverage issues after Hurricane Ike, it will be interesting to follow how the litigation develops.    

    

Rights Under Insurance Policy Assignable

     Can an insured assign the rights to payment under its insurance policy even though the policy includes a consent-to-assignment clause?  The Vermont Supreme Court recently answered, yes.  See In re Ambassador Ins. Co., 2008 Vt. LEXIS 108 (Vt. Aug. 14, 2008).

     Ambassador issued two occurrence-based excess policies to Green Industries covering the periods 1982 to 1984.  Each policy contained a consent-to-assignment clause that barred assignment of the policy unless the insurer consented.  In 1983, Ambassador was placed in receivership.  The superior court appointed a liquidator and ordered that any distributions be made pursuant to a statutory scheme setting priorities.

     Green was sued in a number of asbestos-related cases in the 1980's and 1990's. By 2001, it appeared Ambassador's layer of coverage would be implicated.  Because it faced financial distress due to its massive asbestos-related liabilities, Green assigned all right, claim, title, and interest to payment under the Ambassador policies to National Indemnity Company (NICO) in exchange for cash.  NICO then submitted a claim to the liquidator for $20,000,000, the full amount due under the two policies.  The liquidator refused to pay the full value of the policies because they were no longer policyholder claims.

      NICO requested review by the superior court which held the assignment was invalid because permission had not been obtained from Ambassador or the liquidator as required under the consent-to-assignment clauses. 

     The Supreme Court of Vermont reversed.  Although anti-assignment clauses were enforceable against attempted transfers of the policy itself before a loss has occurred, such a provision did not limit the policyholder's power to make an assignment of the rights under the policy, including the right to receive the proceeds of a policy, after a loss has occurred. Green assigned to NICO its payment rights under the policies, not the policies themselves.  Further, when Green assigned its claims to NICO, the losses that triggered Ambassador's potential liability had already occurred.  Although the exact amount of Ambassador's liability was not known because all of the suits against Green had not been reduced to distinct monetary awards, Ambassador's obligation to insure the risk had not been altered.

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Galveston in the Aftermath of Hurricane Ike

     After visiting Galveston last month, I registered concern about living on the island in this post.  I never imagined the eye of a deadly hurricane would hit Galveston in my lifetime, let alone one month after my visit.

     The reports and television images show near total destruction on Galveston Island.  (See the Houston Chronicle here). The estimates for the region's insurable losses range between six billion and eighteen billion dollars.  Losses of eight billion dollars would make Hurricane Ike at least the fourth most expensive storm in U.S. history. (Katrina remains number one at $41.1 billion in losses.)

    It will be years before the insurance coverage issues are decided, but I doubt the disputes will be as contentious as those arising from Hurricane Katrina.  First, damages from Hurricane Ike may be more easily identified with storm surge, or flood, not wind.  Second, the insurance companies positioned their adjusters on the scene even before the storm hit to be ready to process claims.  This should help resolve the claims and get payments to homeowners sooner than after Katrina where insurers seemingly delayed the processing of claims.  Third, there is now a body of case law from the Fifth Circuit sorting out issues related to flood, wind and hurricane coverage. 

    

Texas Supreme Court Follows Hawai`i Case Law in Adopting Injury-In-Fact Trigger

     In answering a certified question from the Fifth Circuit, the Texas Supreme Court adopted the injury-in-fact trigger for a comprehensive liability policy in Don's Building Supply Inc. v. OneBeacon Ins. Co., No. 07-0639 (Tex. Aug. 29, 2008).

     The insured sold and distributed insulation which was installed in various homes from December 1, 1993 to December 1, 1996.  During this time, the insured was covered by comprehensive general liability policies issued by OneBeacon.  From 2003 to 2005, various Texas homeowners filed suit against the insured, alleging the insulation was defective and not weather-tight, allowing moisture to seep behind the insulation and cause wood rot.  The homeowners alleged the damage began to occur within six months to one year after installation of the insulation.  The district court held that OneBeacon's duty did not arise because the damage was not identifiable during the policy period.

     The Fifth Circuit asked the Texas Supreme Court what the proper rule under Texas law was for determining the time at which property damage occurs for purposes of an occurrence-based CGL policy?  OneBeacon's policy said the insurance applied to "property damage" only if it occurred during the policy period.  The policy defined "property damage" as "physical injury to tangible property." 

     Citing cases from other jurisdictions, including the Hawai`i Supreme Court's decision in Sentinel Ins. Co. v. First Ins. Co. of Haw., 76 Hawai`i 277, 875 P.2d 894, 915, 917 (Haw. 1994), the Texas Supreme Court adopted the injury-in-fact approach, and held that property damage occurred when actual physical damage to property occurred.  Under the facts presented, property damage occurred when the homes suffered wood rot or other physical damage.  Although OneBeacon advocated for the "manifestation rule", the policy did not allow for this application of the rule.  Instead, the policy linked coverage to damage, not damage detection.

     A second certified question from the Fifth Circuit asked whether an insurer's duty to defend was triggered where damage is alleged to have occurred during the policy period but was inherently undiscoverable until after the policy expired?  The Texas Supreme Court again answered "yes."  A claim against the insured that a home suffered physical injury to tangible property during the policy period and was caused by the insured's defective product triggered OneBeacon's duty to defend.  The duty was not diminished because the property damage was undiscoverable until after the policy period.

    

Reversing Itself, Court Finds Anti-Concurrent Causation Clause Valid

    Although it had previously found a policy's anti-concurrent causation clause to be ambiguous, a Louisiana federal district court reversed itself in Cameron Parish School Bd. v. RSUI Indemn. Co., 2008 U.S. Dist. LEXIS 64902 (W.D. La. Aug. 25, 2008). 

     The insured school board had several schools damaged by Hurricane Rita.  It sought coverage under its all-risk policy, but the insurer denied coverage based on the policy's anti-concurrent causation clause.  The clause provided, "We will not pay for loss or damage caused directly or indirectly by any of the following.  Such loss or damage  is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss."

     The court's prior decision finding this clause to be ambiguous was issued before the Fifth Circuit decided Leonard v. Nationwide Mut. Ins. Co., 449 F.3d 419 (5th Cir. 2007) and Tuepker v. State Farm Fire & Cas. Co., 507 F.3d 346 (5th Cir. 2007).  In these cases, the Fifth Circuit upheld the anti-concurrent causation clause, determining the plain language supported its clarity and defined its meaning.  The Fifth Circuit also held that insurers may supplant the default efficient proximate causation rule with an anti-concurrent causation clause. 

     Here, the school board argued that Leonard and Tuepker were decided under Mississippi law while this case was controlled by Louisiana law.  The district court disagreed, finding itself bound by the conclusion of the Fifth Circuit that the anti-concurrent causation clause was not ambiguous.  Further, under Louisiana law, insurance companies and their insureds could opt-out of the efficient proximate cause doctrine by contract.  Finally, it appeared Louisiana was in accord with most jurisdictions which have held that anti-concurrent causation clauses comport with state public policy.