Insurance Law Hawaii

Ninth Circuit Again Considers Impact of Notice on Cancellation of Policy

    In a prior post, we discussed Cornhusker Cas. Ins. Co. v. Kachman, No. 06-35106 (9th Cir. Jan. 30, 2008).  In the initial Cornhusker decision, the Ninth Circuit certified to the Washington Supreme Court the issue of whether a cancellation letter sent by certified mail but never received by the insured was effective under Washington law.   On December 18, 2008, the Washington Supreme Court answered, "no."  See Cornhusker Cas. Ins. Co. v. Kachman, 2008 Wash. LEXIS 1226 (Wash. Sup. Ct. Dec. 18, 2008). 

    Thereafter, the Ninth Circuit  issued an Order amending its prior opinion.  Cornhusker Cas. Ins. Co. v. Kachman, No. 06-35106 (9th Cir. Jan. 13, 2009)(Order Amended Opinion and Amended Opinion).  The amended opinion notes that the Washington Supreme Court determined that sending a notice of cancellation by certified mail does not satisfy the "mailed" requirement of the statute.  In order for certified mail to meet the statutory notice requirement, the notice must be "actually delivered."  Cornhusker Cas. Ins. Co., 2008 Wash. LEXIS 1226, at *13.  Consequently, the Ninth Circuit's amended opinion held that because the insureds did not receive delivery of the cancellation letter, the insurer did not provide an effective cancellation notice.

    It is an open question whether Hawai`i law would adopt a similar position.  Haw. Rev. Stat. 431:10-226.5 says nothing about receipt of a cancellation notice.  It only states, "Cancellation . . . shall not be deemed valid unless evidence of mailing is provided." 

    My Damon Key colleague Robert Thomas, author of inversecondemnation.com, gave me notice of the first Cornhusker decision rendered by the Ninth Circuit.  My Damon Key colleague Mark Murakami, author of hawaiioceanlaw.com, gave me notice of this recent Cornhusker order.  They both do their best to keep me on my toes.

We're At Alltop

    Our blog has been added to Alltop (http://insurance.alltop.com/), a site featuring many insurance-related blogs nationwide.  For each blog, Alltop lists several of the most current posts.  So you can now log onto Alltop, visit insurancelawhawaii.com, and then check what is offered on other insurance-related sites.

    Thanks to Alltop for including our blog.

Burden of Proof Crucial in Determing Number of Occurrences

    A case decided by the Illinois Supreme Court demonstrates how crucial the burden of proof is in determining coverage issues.  The court determined two closely related deaths constituted two occurrences under the insured landowner's comprehensive liability policy.  See Addison Ins. Co. v. Fay, No. 105752 (Ill. Sup. Ct. Jan. 23, 2009).  Accordingly, the policy's aggregate limit was applicable.

    Two boys left their homes to go fishing late one afternoon.  They did not return and their bodies were found several days later in an excavation pit on the insured's property.  The bodies were trapped in wet clay and sand at the edge of a pool of water in the excavation pit.  The cause of one boy's death was determined to be hypothermia.  The immediate cause of the second boy's death was drowning secondary to hypothermia.

    The investigators concluded one boy attempted to jump across the water, but became trapped.  The second boy apparently attempted to help his friend, but became trapped himself.  The investigators could not determine how much time elapsed between the two entrapments. 

    When the boy's families sued the insured property owner, the insurer agreed to settle the claims for policy limits.  The policy provided a "general aggregate" limit of $2 million, and an "each occurrence" limit of $1 million.  The insurer filed for declaratory relief to determine whether the boys' deaths constituted one or two occurrences.

    The trial court found the deaths were the result of two occurrences because the causes of death and the circumstances immediately prior to the deaths were different.  The appellant court reversed, determining the boys' deaths were so closely linked in time and space as to be considered one occurrence.

    The Illinois Supreme Court reversed.  First addressing the burden of proof, the court determined the boys' families had demonstrated the injuries were covered under the insured's policy and occurred on property insured by the carrier.  Next, the Supreme Court agreed with the appellate court's adoption of the "time and space" test.  Where negligence resulted from an ongoing omission rather than separate affirmative acts, a time and space test effectively limited what would otherwise potentially be a limitless bundling of injuries into a single occurrence. 

    But the Supreme Court disagreed that the facts here conclusively demonstrated that the boys' injuries constituted only a single occurrence.  From the evidence, the court could infer that the boys were not trapped simultaneously, but one boy was trapped and the other became trapped while trying to free his friend.  Otherwise, there was little evidence to support the insurer's claim that the injuries were the result of a single occurrence.  The investigators could not determine how closely in time the boys became trapped.  Because the insurer could not meet its burden, the boys' injuries constituted two occurrences.

    The Hawai`i Supreme Court has never had occasion to consider adoption of the "time and space" test.

    

Fifth Circuit Again Holds in Favor of Policy Holder in Katrina-Related Dispute

    A prior post addressed Dickerson v. Lexington Ins. Co., 2008 U.S. App. LEXIS 26504 (5th Cir. Dec. 22, 2008), wherein the Fifth Circuit reversed its trend by issuing a Katrina-related decision in favor of the policy-holder.  The Fifth Circuit recently upheld another decision in favor of policy-holders after Hurricane Katrina destroyed their home.  See  Grilletta v. Lexington Ins. Co., 2009 U.S. App. LEXIS 276 (5th Cir. Jan. 8, 2009).

    The insured's policy covered damage from wind but excluded "water damage."  On November 13, 2005, Lexington's adjuster determined the damage was wind related and not caused by flood.  Consequently, he recommended Lexington pay the policy limits of $400,000 for the dwelling. 

    Lexington took no action until January 26, 2006, when it hired an engineering company to do a damage causation analysis.  The engineering company, in turn, hired a meteorologist who determined the storm surge was the proximate cause of the destruction, not wind.  Thereafter, Lexington paid only $191,674 for damage to the dwelling.

    Plaintiffs sued.  Plaintiffs' expert, an engineer, asserted that either a tornado or high winds destroyed the house, and that there was a small storm surge of ten to twelve feet.  On the other hand, Lexington's experts, the meteorologist and an engineer, stated there was no evidence of a tornado or winds strong enough to destroy the house.  Instead, a storm surge of at least fifteen feet caused the destruction.  The trial court determined Lexington had not met its burden to demonstrate the water damage exclusion applied.  Therefore, the court ruled the full $400,000 payment for loss of the house was appropriate.

    The Fifth Circuit affirmed.  Lexington's experts conceded that a tornado or high winds could have damaged the house.  The district court did not find conclusive Lexington's meteorological data suggesting water was the proximate cause of the damage.  Given the battle of experts, the trial court was free to choose among the competing explanations in rendering its decision. 

    The Fifth Circuit also affirmed an award of statutory penalties for arbitrarily failing to pay a claim within thirty days.  After receiving the first adjuster's report concluding that the wind caused the damage, Lexington took no action for over sixty days. 

    Hawaii's Unfair Claim Settlement Practices Act lists as an unfair practice the failure to offer payment within thirty days of affirmation of liability if the amount of the claim has been determined and it is not in dispute, Haw. Rev. Stat. 431:13-103 (a)(11)(F), but there is no statutory penalty for such delay.

Katrina Canal Breaches Litigation Continues

    In one of the major Hurricane Katrina-related decisions, In Re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Cir. 2007), the Fifth Circuit overturned the district court’s decision that flood exclusion is ambiguous.  Hundreds of claims are still being litigated in the district court where an order was recently entered dismissing duplicate claims.  See In Re Katrina Canal Breaches Litigation, 2009 U.S. Dist. LEXIS 1148 (E.D. La. Jan. 7, 2009).

    In the current proceedings, Allstate filed a Motion to Dismiss Duplicate Claims, seeking to dismiss without prejudice those claims that are duplicative of other lawsuits filed within In Re Katrina Canal Breaches Litigation.  Allstate argued the earlier-filed lawsuit for each plaintiff should proceed and the later-filed lawsuit should be dismissed.

    The court noted that under the "first to file" rule, where a party has filed multiple lawsuits concerning the same facts, the district court can dismiss the later-filed action.  This eliminates wasteful duplicative litigation, avoids rulings that may offend a sister court's authority, and avoids piecemeal resolution of issues calling for a uniform result.  The "first to file" rule is discretionary, however.

    Here, seven of the cases addressed in Allstate's motion had a settlement pending in the later-filed suit.  Therefore, in these cases, the court found it prudent to dismiss the earlier-filed suits to allow the settlement discussions to continue in the later-filed suits.  Otherwise, Allstate's motion was granted.

California Court Allows Stacking of Multiple Policies, Follows "All Sums" Rule

    The California Court of Appeal recently issued an important case involving coverage for continuous property damage over several policy periods.  Among its various rulings, the court held policy limits of multiple policies could be stacked.  Further, the "all sums" rule, obligating each insurer to pay the entire claim, was applicable.  See State of California v. Continental Ins. Co., 2009 Cal App. LEXIS 1 (Cal. Ct. App. Jan. 5, 2009).

    The case involved long-standing litigation regarding an industrial waste disposal site built by the state and which began operations in 1956.  In 1972, groundwater contamination was discovered and the site was closed.  In 1998, a federal court found the state liable.  The state then sued its insurers for amounts it was ordered to pay to clean up the site. 

    The trial court ruled each insurer was potentially liable for the total amount of loss, subject to policy limits, rejecting the insurers' contention they were only liable for the portion of the loss attributable to their own policy periods (all sums ruling). But the trial court further ruled the state could not recover the policy limits in effect for every policy period.  Instead, the state had to choose one policy period, and could recover only up to the policy limits of the policies in effect during the period (no-stacking ruling).  Because the state had settled with other insurers for $120 million, this amount had to be set off against the insurer's liability.  Therefore, the trial court's ruling limited the maximum recovery from all insurers to $48 million.  As a result, the state was awarded a nominal judgment in the amount of zero dollars. 

    All Sums Ruling 

    The insurers agreed that under Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645 (1995), they were liable for property damage that occurred during their respective policy periods.  They denied, however, liability for any property damage occurring before or after their policy periods.  The insurers urged adoption of a rule allocating the total property damage pro rata, based on each insurer's time on the risk. 

    The appellate court disagreed because Montrose determined that an insurer on the risk when continuous or progressively deteriorating damage first manifests itself is obligated to indemnify the insured for the entirety of the ensuing damage.  Therefore, each insurer covered the total amount of the state's liability for property damage (subject to their respective policy limits), including property damage that occurred before or after their policy periods.

    No-Stacking Ruling

    Because the loss was greater than the limits of any one applicable policy, the state sought to stack the policy limits across the policy periods.  Although FMC Corp. v. Plaisted & Companies, 61 Cal. App. 4th 1132 (1998) held insureds could not stack limits across policy periods, this court found FMC's reasoning flawed.  The policy language provided for stacking.  Even though there was only one occurrence, the insured could recover against each insurer up to the limits of the insurer's policy.  Therefore, the state was entitled to stack the policy limits of all applicable policies across all applicable policy periods. 

    One-Occurrence Ruling

    The state argued there were several occurrences based on various periods of leakage from the waste site.  But once the leakage began, it was continuous.  The policies defined "occurrence" as "a continuous or repeated exposure to conditions which result in . . . damage to property. . . ."  Therefore, there could be multiple contributing conditions, but only a single occurrence.

    No-Mitigation Ruling

    In the underlying case, the court found the state negligently delayed remediation of the site.  This ultimately increased the cost of the clean up.  The insurers, therefore, argued the state violated its duty to mitigate.  The court disagreed.  A duty to mitigate applied to damages resulting from the defendant's wrongful conduct.  Here, the amounts caused by the alleged failure to mitigate were not the consequences of the insurers' (defendants') breach.  Moreover, the insurers' breach did not cause the remediation costs for which the state was held liable.  Consequently, the doctrine of mitigation did not apply.

    Hawaii Law

    No appellate court in Hawai'i has yet adopted the "all sums" rule.  Stacking has been addressed by the Hawai`i Supreme Court in terms of underinsured motorist coverage.  See, e.g. Macabio v. TIG Ins. Co., 87 Hawai`i 307, 955 P. 2d 100 (1998).   In Sentinel Ins. Co. v. First Ins. Co., 76 Hawai`i 277, 875 P.2d 594 (1994), the Hawai'i Supreme Court addressed equitable allocation among two insurers, but did not address stacking of multiple policies covering various periods of continuous, progressive property damage. 

California Court of Appeal Affirms Bad Faith Ruling for Insurer's Delays

    The California Court of Appeal upheld a bad faith ruling based on the insurer's delay in paying benefits.  See Major v. Western Home Ins. Co., 2009 Cal. App. LEXIS 4 (Cal. Ct. App. Jan. 6, 2009).

    The insureds' home was destroyed by a wild fire in October 2003.  They held a homeowners policy from Western.  The policy provided $193,000 for dwelling, $19,300 for other structures, $135,000 for personal property, $38,600 for living expenses and $18,000 for mortgage disaster protection.  The policy included an "extended replacement cost" provision, promising to pay up to a specified percentage above policy limits to replace damaged property.

    After the home was totally destroyed by the fire, Western used another company, Cambridge, to administer the claims.  Western did not make its first payment until February 2004.  Thereafter, Cambridge assigned a new, inexperienced claims adjuster to the claim.  Western fell two months behind in mortgage payments.  The 77 page inventory sent by the insureds in May 2004 was ignored for over three months despite numerous call and requests from the insureds.  The new adjuster complained to the insureds that it would be a nightmare to have to review the inventory and that the file was 16 inches thick.

    The insureds hired counsel in October 2004.  A supervisor at Cambridge thereafter worked on the file.  Fifteen days later, Western paid personal property benefits the insureds submitted in May.  Subsequently, the insureds submitted receipts for replacement cost of personal property because Western had only paid depreciated value.  The supervisor claimed the receipts had been faxed and she could not read them.  She admitted at trial, however, this statement was false and the receipts had been mailed.  Moreover, the supervisor realized "other structure" benefits had not been paid for the pool and spa, but did not pay these benefits until five months after she began handling the claim. 

    Suit was filed in February 2005.  The jury found in favor of the insureds for breach of contract and bad faith. The total damage award was $1.3, including $450,000 for emotional distress and $646,471 for punitive damages.

    The Court of Appeal affirmed.  There was substantial evidence the insureds suffered significant emotional distress caused by Western's delayed payment of benefits and its refusal to pay amounts clearly covered under the policy. 

    Western argued punitive damages were not warranted because the supervisor and other claims adjusters at Cambridge were not managing agents at Western.  The Cambridge supervisor, however, exercised substantial discretionary authority to pay or not to pay benefits owed the insureds.  In fact, she made the decision to refuse to pay benefits ultimately awarded by the jury based on her untrue statement that the receipts were illegible because they were faxed.  The punitive damages were slightly more than a one-to-one ratio to the tort damages, and therefore not excessive.

    Hawai`i recognizes the tort of good faith and fair dealing against insurers.  Further, Hawai`i courts permit punitive damages in bad faith cases. See, e.g., The Best Place v. Penn Am. Ins. Co., 82 Hawai`i 120, 920 P.2d 334 (1996).

Regulating Insurance Companies in Hawaii

    I was recently asked to look into investment and disclosure requirements for health insurance companies authorized to issue policies in Hawaii.  A summary follows:

    Hawaii Law

    Investment requirements for all insurance companies are addressed in the Article VI of the Hawaii Insurance Code, Haw. Rev. Stat. §431:6-101-6-602.  Generally, any security or other investment purchased by an insurer must be interest bearing, a dividend or income paying; not in default; and purchased at or below its fair value. Haw. Rev. Stat. §431:6-104. Other than investments in general obligations of the United States or any State government, an insurer shall not hold any combination of investments or loans upon the security of obligations, property, and securities of any one entity aggregating an amount exceeding ten percent of the insurer’s assets. Haw. Rev. Stat. §431:6-105.

    An incorporated insurer must invest its funds aggregating in amounts not less than sixty percent of its minimum required capital in cash or public obligations and in mortgage loans on real property.  Haw. Rev. Stat. §431:6-201(a).  Further, an insurer shall invest its funds aggregating not less than one hundred percent of its reserves required by the Insurance Code in cash or premiums in course of collection, or in investments eligible in accordance with Article VI. Haw. Rev. Stat. §431:6-201(b).

    Permitted investments by the insurer are addressed in Haw. Rev. Stat. §§431:6-301 - 6:324. These include such items as public and corporate obligations, preferred or guaranteed stocks, common stocks, evidences of debt secured by mortgages or deeds of trust guaranteed or insured by the United States, security agreements, real property, savings accounts, and certificates of deposit, etc.

    The insurer can also invest in "investment pools" with other insurers. Haw. Rev. Stat. §431:6-601. The statute sets forth the types of investments permitted by an investment pool. Haw. Rev. Stat. §431:6-601(b).

    Prohibited investments include a company's own stock, securities issued by an insolvent corporation, or any investment which is determined by the commissioner to be designed to evade any prohibitions of Article VI. Haw. Rev. Stat. §431:6-401.

    Finally, any investment must be approved by the insurance company's board of directors. Haw. Rev. Stat. §431:6-404.

    Insurers file an annual report with the Insurance Commissioner that gives detailed information on investments.  These reports are available to the public.

    Employment Retirement Income Security Act (ERISA)

    ERISA provides further regulation of the investment of funds held by a health insurer.

    Under ERISA, a person is a fiduciary with respect to an employee benefit plan to the extent the person exercises any authority or control over the management or disposition of the plan's assets. 29 U.S.C. §1002(21).  A plan fiduciary must discharge its duties with respect to an employee-benefit plan solely in the interest of the plan's participants and beneficiaries. 29 U.S.C. §1104(a)(1).  This means the fiduciary must act:

• for the exclusive purpose of providing benefits to participants and beneficiaries, and defraying the reasonable expenses of administering the plan. 29 U.S.C. §1104(a)(1)(A).
• with the care, skill, prudence, and diligence that a prudent person acting in like capacity and familiar with such matters would use. 29 U.S.C. §1104(1)(1)(B).
• by diversifying the investments of the plan to minimize the risk of large losses, unless, under the particular circumstance, it is not prudent to diversify. 29 U.S.C. §1104(a)(1)(C).
• in accordance with the documents and instruments governing the plan to the extent those documents and instruments are consistent with the provisions of ERISA. 29 U.S.C. §1104(a)(1)(D).

    ERISA does not establish any specific limitations on the amount or percentage of plan assets that may be invested in securities. However, the basic fiduciary standards impose restrictions on the amount of plan assets that may be invested in securities by establishing diversification requirements. 29 U.S.C. §1104(a)(1)(C).

    ERISA prohibits some transactions, including transactions between a plan and a party in interest with respect to the plan. 29 U.S.C. §1106(a)(1). Further, a fiduciary may not deal with the assets of the plan in his or her own interest or for his or her own account. 29 U.S.C. §1106(b).

Hawai`i Legislature's Transfer of Assessments on Insurers to General Fund Violates Separation of Powers

    Last April we reviewed the Hawai`i Intermediate Court of Appeals' (ICA) decision that the Insurance Commissioner's assessments against insurers were unconstitutional taxes.  The Hawai`i Supreme Court recently affirmed in part, reversed in part.  See  Hawaii Insurers Council v. Lingle, 2008 Haw. LEXIS 287 (Haw. Dec. 18, 2008).

    In 1999, the legislature created the Insurance Regulation Fund (IRF), directing the Commissioner to make assessments against insurers to assist in administering the insurance laws in Hawai`i.  In 2002, the legislature authorized transfer of $2,000,000 out of the insurance special fund to the general fund.  Eventually, $3.5 million was transferred to the general fund. 

    Insurers, including the Hawai`i Insurers Council (HIC), filed suit, arguing the transfers converted the assessments into an illegal and unconstitutional tax. The circuit court granted HIC's motion for summary judgment and the ICA affirmed.

    The Supreme Court determined the assessments were not unconstitutional when they were initially imposed.  The Court was guided by San Juan Cellular Tel. Co. v. Public Serv. Comm'n of Puerto Rico, 967 F.2d 683 (1st Cir. 1992) in determining the assessments were a regulatory fee.  The funds transferred from the IRF were used to support the overhead provided by the Department of Commerce and Consumer Affairs (DCCA).  The DCCA supplied the insurance division with personnel management services, processing of the division's expenditures, computer system support, and various administrative services.  Therefore, the funds were not taxes under the San Juan Cellular test.

    Nevertheless, the legislature's transfer of the IRF funds to the general fund was unconstitutional under the separation of powers.  Once the funds were transferred to the general fund, they were available for general purposes instead of funding the needs of the insurance division.  The legislature's transfer blurred the distinction between the executive power to assess regulatory fees and the legislative power to tax for general purposes.  Therefore, the Supreme Court affirmed the ICA's decision that the legislature's transfer bills were unconstitutional.  But it reversed the ICA's judgment that the assessments levied to provide overhead expenses for the DCCA represented unconstitutional taxes.

Hawai`i Supreme Court Reinstates Emotional Distress Claim Against Insurer

    Although the insurer's conduct did not amount to bad faith in Young v. Allstate Ins. Co., 119 Haw. 403 (Haw. 2008), the court held plaintiff's allegations of intentional infliction of emotional distress (IIED) were sufficient to survive a motion to dismiss.

    Plaintiff alleged she was stopped in traffic when a car operated by an Allstate-insured driver rear-ended her, destroying her auto. The insured informed Allstate he had fallen asleep and caused the crash.  Plaintiff, who was 84 years old, suffered injuries to her neck, ribs, right knee and thoracic and lumbar spine.

    An Allstate representative contacted Plaintiff the day of the accident, promised she was in good hands, would be provided with quality service, and would not need an attorney. In two subsequent letters, Allstate promised to provide quality service to plaintiff. 

    Plaintiff attempted to resolve her claim against Allstate without the assistance of an attorney.  Although she had already incurred over $6,000 in medical expenses, Allstate offered to settle for only $5,300.  Plaintiff rejected the offer, but was deeply distressed because she felt Allstate was breaking its promises.  She thereafter retained an attorney and sued. The answer alleged plaintiff was negligent and had failed to mitigate her injuries. This caused plaintiff, who was now 87, extreme distress and shame.  Ater taking her deposition, Allstate's attorney indicated he would recommed a policy limits settlement of $25,000.  Allstate, however, refused to increase its offer.  In non-binding arbitration, Plaintiff damages were determined to be $45,000.  Allstate never took the arbitration seriously and appealed the decision, requesting a trial de novo.

    The jury awarded plaintiff $198,971.71.  Fees and costs for the arbitration and pre-judgment interest were also awarded to plaintiff.  Allstate offered to settle for $260,000 if plaintiff would release any claim for bad faith.  Plaintiff refused and sued Allstate for bad faith and other claims. 

    Allstate filed a motion to dismiss, arguing it did not owe a duty of good faith and fair dealing because the parties did not have a contractual relationship by virtue of its promises and letters.  The trial court agreed.  Further, the trial court ruled Allstate's acts were not beyond all bounds of decency nor outrageous.  Therefore, the IIED claim was also dismissed.

    The Supreme Court affirmed dismissal of the bad faith claim.  Plaintiff alleged neither detrimental reliance nor consideration.  Accordingly, there was no contract between plaintiff and Allstate, and the bad faith claim failed.

    Plaintiff did, however, adequately allege a claim for IIED.  In Hawai`i, the tort consists of the following elements: (1) the act allegedly causing the harm was intentional or reckless, (2) the act was outrageous, (3) the act caused, (4) extreme emotional distress to another.  Allstate's insured admitted he caused the accident when falling asleep at the wheel.  Allstate immediately contacted plaintiff and assured her she would be treated fairly.  Nevertheless, Allstate only offered plaintiff a mere $5,300 to settle.  Given these facts, reasonable people could differ as to whether Allstate acted without just cause or excuse and beyond all bounds of decency in the underlying case.  The court determined that upon reading plaintiff's complaint, average members of the community might exclaim, "Outrageous!"  Therefore, the trial court erred in dismissing plaintiff's IIED claim.