Insurance Law Hawaii

Hawai`i Court Upholds Medical Insurer's Denial of Excluded Procedure

    Whether coverage for an allogeneic stem-cell transplant ("allo-transplant") was properly denied by the insurer was at issue in Hawaii Medical Service Association v. Adams, No. 28899 (Haw. Ct. App. May 21, 2009) [here].  An allo-transplant, used to treat myeloma, involves the harvesting and transplanting of stem cells from a matched donor. "Myeloma" is a form of cancer which affects the bone marrow cells and involves several different bones at the same time.

    Hawaii Medical Service Association ("HMSA") denied pre-authorization for an allo-transplant for the insured.  Based on Blue Cross Blue Shield Association's Guidelines ("BCBSA Guidelines"), HMSA determined the request was "investigational."  An internal appeal was filed pursuant to the policy's procedures. The appeal upheld the denial of pre-authorization for the allo-transplant because multiple myeloma was not listed in the policy as a condition for which an allo-transplant would be covered.  Further, the BCBSA Guidelines only recommended use of allo-transplant to treat multiple myeloma in a clinical trial setting.   

    The insured appealed HMSA's denial to the Insurance Commissioner.  The Notice of Proposed Order recommended HMSA be ordered to provide coverage for the allo-transplant.  HMSA then approved the coverage, and the insured received the allo-transplant. The Commissioner's Decision and Order agreed that an allo-transplant for multiple myeloma was not covered, but the exclusion was not specifically enumerated as an excluded benefit in Chapter 6.   

    The Circuit Court upheld the Commissioner's decision, but the Hawai`i Intermediate Court of Appeals reversed.  The relevant statute, Haw. Rev. Stat. 432E-1.4 (a), stated coverage must be provided if recommended by the treating health care provider and determined by the health plan's medical director to be medically necessary, unless specifically excluded. 

    The policy language "specifically excluded" an allo-transplant as a treatment for multiple myeloma.  Chapter 6 of HMSA's policy stated there was no coverage for transplant services other than those described in Chapter 4. Chapter 4 limited benefits for bone marrow transplants to allo-transplants "for the specified diseases or conditions described in this section." Chapter 4 then listed fourteen specific diseases or conditions for which an allo-transplant was covered, but did not include transplants for multiple myeloma.

    Under the Commissioner's interpretation of the policy, HMSA would be required to list every conceivable medical condition for which coverage for allo-transplants would be excluded.  This was neither practical nor reasonable.

    Special thanks to my Damon Key colleague and fellow blogger, Mark Murakami (hawaiioceanlaw.com), for early notice of the Adams case.

Waiving Stacked Coverage Continues When Additional Cars Added to Policy

    Considering Pennsylvania law, the Third Circuit was asked whether the insured waived "stacked" UIM benefits in subsequent policies that listed additional automobiles?  See State Auto Prop. & Cas. Ins. Co. v. Pro Design, P.C., No. 08-3006 (3rd Cir. May 12, 2009) [here].  In a result consistent with Hawai`i law, the Third Circuit held the initial wavier applied when automobiles were later added to the policy.

    The insured was involved in an automobile accident while riding in a vehicle insured under a Business Auto Policy issued by State Auto.  When issued in June 2001, the policy covered only one vehicle and provided $35,000 in underinsured motorist (UIM) coverage.  The insured signed a written waiver of "stacked" UIM coverage.  The policy was renewed in subsequent years, including 2004, when the insured added a second vehicle.  In 2006, a third vehicle was added.  State Auto did not provide the insured with the opportunity to sign additional stacking waivers when adding the second and third vehicles. 

    After renewal of the policy in 2007, the accident occurred.  State Auto determined the stacking of UIM benefits was waived even when new automobiles were added and the liability limit was only $35,000.  The insured, on the other hand, contended it never waived stacking of coverage when adding automobiles to the policy.  Therefore, the liability limit was $105,000, or $35,000 for each of the three vehicles covered by the policy.  The District Court agreed with the insured and ruled the initial stacking waiver was invalid because of the addition of new vehicles to the policy.

    The Third Circuit reversed.  It noted a Pennsylvania statute that presumed stacking applied unless waived by the insured for a smaller premium.  The insured argued stacking applied to its policy because, while it waived stacking when purchasing a single-vehicle policy, the statute required the execution of an additional waiver upon the addition of vehicles to the policy.  State Auto, however, argued the stacking waiver executed upon purchase of the single-vehicle policy remained valid as to the multi-vehicle policy.  To settle this argument, the Third Circuit turned to two potentially conflicting decision of the Pennsylvania Supreme Court.

    In Sackett v. Nationwide Mut. Ins. Co., 919 A.2d 194 (Pa. 2007)(Sackett I), the court held the statute required when adding a new car to an existing policy, the insurer must provide a new stacking waiver in order to permit the insured to waive the increased amount of available stacked UM/UIM coverage.

    In Sackett II, however, the Pennsylvania Supreme Court modified Sackett I after rehearing.  See Sackett v. Nationwide Mut. Ins. Co., 940 A.2d 329 (Pa. 2007)(Sackett II).  The court held that the extension of coverage to a vehicle added to a pre-existing multi-vehicle policy was not a new purchase of coverage under the statute, and therefore did not obligate the insurer to obtain new or supplemental UM/UIM stacking waivers.  Notably, however, the court warned that its decision was limited to the addition of a vehicle to a multi-vehicle policy, leaving unresolved a situation where additions were made to single-vehicle policies.

    In Pro Design, the Third Circuit predicted the Pennsylvania Supreme Court would extend its ruling in Sackett II to a single-vehicle policy.  The statute did not require State Auto to provide the insured with the opportunity to waive stacking upon the addition of the second and third vehicles to the policy.  The waiver signed at the inception of the policy remained valid upon the addition of those vehicles and the subsequent renewals of the policy. 

    Under Hawai`i law, stacking of UM/UIM coverage is controlled by statute.  An insurer must offer UM/UIM coverage with the option to stack coverage.  Haw. Rev. Stat. 431:10C-301(d).  If UM or UIM coverage is rejected, no further offer is required to be included in any renewal or replacement policy issued to the insured.  See Dai-Tokyo Royal State Ins. Co. v. Yokote, 103 Haw. 181, 188 n. 9, 80 P.3d 1002, 1009 n. 9 (relying on Haw. Rev. Stat. 431:10C-301 (e).

Insured's and Insurer's Prior Acts Constitute Admissions of Wind and Flood Damage

    Senior Judge Senter from the Southern District of Mississippi continues to be on the front lines of the Katrina insurance coverage battles.  In a case headed for trial, Judge Senter recently denied motions by both the insured and insurer attempting to establish estoppel on coverage issues.  See Politz v. Nationwide Mut. Fire Ins. Co., No. 1:08CV18, 2009 U.S. Dist. LEXIS 39857 (S.D. Miss. May 11, 2009).

    After Hurricane Katrina, the insured applied for and received a grant from the Mississippi Development Authority (MDA).  Nationwide's motion argued this was an admission that at least some of the damage to the insured's home was caused by storm surge flooding.  The court held that applying for and accepting the MDA grant was an admission by the insured that property was damaged by storm surge.  But unlike the receipt of benefits from flood insurance, accepting the MDA grant did not indicate that the amount of flood damage was equivalent of the amount of the grant.  Accepting the grant would only be admissible if the insured argued that storm surge flooding played no part in damaging the property.

    The insured's motion sought to determine the payment of benefits by the insurer constituted an admission that the property sustained covered wind damage in the amount of the payment.  The insurer's payment of $30,339.57 was accompanied by a letter stating, "We are enclosing a check for the amount of damages which we believe we owe at this time for damages caused during Hurricane Katrina."  The insurer argued its payment was voluntary.  Based on the insurer's letter, the court disagreed.  Taking the insurer at its word, the payment was a best estimate of the amount owed the insured under the homeowners policy.  If the insurer attempted at trial to assert it owed nothing under the policy, the letter would be admissible for credibility purposes.

    Therefore, while Judge Senter did not find estoppel by either the insured or insurer, both acts were admissions which would be allowed into evidence should either party argue the damage was not caused by both wind and flood.

Business Auto Policy Does Not Extend to Independent Contractor's Vehicle

    In Union Standard Ins. Co. v. Hobbs Rental Corp., No. 07-2184 (10th Cir. May 5, 2009)[here], the court determined the insured's business auto policy did not cover vehicles owned and operated by an independent contractor.

    The insured company rented oil drilling equipment.  It hired an independent contractor to transport a "mud separator" from an oil field to the insured's yard.  The independent contractor exercised complete control over the transport job, using its own employees and truck.  An employee of the independent contractor was severely electrocuted when the truck touched an overhead power line.  The employee sued the insured, who placed its comprehensive liability carrier on notice.  When the carrier declared bankruptcy, the insured sought coverage from Union Standard under its business automobile policy.  Union Standard defended under a reservation of rights.

    The policy provided coverage for certain "non-owned autos," defined as, "Those autos you do not own, lease, hire, rent or borrow that are used in connection with your business.  This includes autos owned by your employees or partners or members of their households but only while used in your business or your personal affairs."  The district court granted summary judgment to the insured.

    The Tenth Circuit reversed.  The second sentence of the non-owned auto provision indicated it was intended to cover a narrow and foreseeable set of circumstances involving the insured's employees or members of their households.  Considering the "in connection with" language with the entire provision suggested that instead of covering all autos somehow related to the insured's business, the policy was intended to apply only to persons affiliated with the insured and operating privately-owned vehicles while performing company-related work.  Given this language, the court declined to expand coverage to independent contractors who did business with the insured.

No Coverage Where Each Possible Efficient Proximate Cause Excluded

    Coverage under a homeowners' policy was denied by State Farm when corrosion surrounding a nail driven through a pipe caused a leak and extensive water damage many years later.  See Freedman v. State Farm Ins. Co., B202617 (Cal. Ct. App. May 5, 2009)[here].  The policy provided "all-risk" coverage, but excluded loss from: (1) corrosion, electrolysis or rust; and (2) "water damage, meaning continuous or repeated seepage or leakage of water from a plumbing system."  Further, the policy excluded negligent conduct and defective workmanship by third parties whenever they interacted with an excluded peril.

    The insureds argued the contractor's negligence in driving the nail through the pipe was a covered peril and was the efficient proximate cause of the loss.  State Farm contended the identity of the efficient proximate cause of the loss did not matter because each of the possible efficient proximate causes was an excluded peril - corrosion and seepage or leakage of water were excluded, and third-party negligence was excluded whenever it interacted with an excluded peril.  The trial court granted  State Farm's motion for summary judgment.

    The Court of Appeal was influenced by the California Supreme Court's decision in Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747 (2005).  There, the all-risk homeowner's policy excluded: (1) earth movement; and (2) weather conditions whenever they interacted with an excluded peril to cause loss.  When heavy rains caused a landslide, damaging the Julians' home, there was no coverage because the policy excluded each of the efficient possible proximate causes of the loss.  

    A similar analysis applied here.  The third-party negligence provisions of the homeowners' policy excluded third parties' negligent conduct and defective workmanship when they interacted with an excluded peril.  Thus, the policy excluded contractor-negligence-induced corrosion and contractor-negligence-induced continuous or repeated seepage or leakage of water, just as the Julians' policy excluded a rain-induced landslide.

Insured Cannot Claim Defense Costs Incurred Prior to Giving Notice of Claim

    Determining the duty to defend does not arise until the insurer receives notice of a claim, the Indiana Supreme Court further found the insured has no right to pre-notice defense costs.  Dreaded, Inc. v. St. Paul Guardian Ins. Co., No. 49S02-0805-CV-244, Ind. Sup. Ct. April 28, 2009) [here].

    In November 2000, Dreaded received a letter from the Indiana Department of Environmental Management ("IDEM") demanding an investigation of possible soil contamination at Dreaded's former business site.  After Dreaded conducted an investigation and submitted reports, IDEM ordered Dreaded to conduct a further investigation in August 2003.  Not until March 2004 did Dreaded notify St. Paul, its CGL carrier, requesting a defense and reimbursement for defense costs incurred prior to the notice.

    St. Paul agreed to defend from the point of notice forward, but reserved rights and refused to reimburse for prior defense costs.  Dreaded sued for defense costs incurred prior to its notice to St. Paul.  The trial court granted summary judgment to St. Paul, determining no showing of the insurer's prejudice was necessary because the three and a half year delay in tendering the defense was unreasonable as a matter of law.  The Court of Appeals reversed.  Although the delay in providing notice was unreasonable and prejudice was presumed, the presumption was rebuttable.  Dreaded had demonstrated sufficient evidence to raise a genuine issue of material fact as to whether St. Paul was prejudiced by the delayed notice.

    The Indiana Supreme Court affirmed the trial court's granting of summary judgment to St. Paul.  Prejudice was an irrelevant consideration.  The insurer could not defend a claim of which it had no knowledge.  The duty to defend did not arise until the insurer received proper notice. Here, the policy required prompt notice.  Moreover, the policy prohibited the insured from assuming any financial obligations without the insurer's consent. 

Construction Defects "Expected and Intended" Despite Insured's Claim of Ignorance

    Whether the insured  had sufficient knowledge of a construction defect to justify the insurer's denial of coverage was the issue in Far Northwest Dev. Co., LLC v. Cmty. Ass'n of Underwriters of Am., Inc., Case. No. C-05-2134, 2009 U.S. Dist. LEXIS 34521 (W.D. Wa. April 22, 2009).

    In the underlying case, the Homeowner's Association claimed Mr. Ghoddoussi, the condominium manager, failed to adequately investigate defects during the development of the complex, resulting in significant damage to the condominiums.  Ghoddousi tendered the defense to the insurer.  The tender was denied because the policy excluded coverage for "'property damage' expected or intended from the standpoint of the insured."

    Ghoddousi sued the insurer.  On the insurer's motion for summary judgment, the court determined the loss was "expected or intended" from the standpoint of Ghoddousi, thereby precluding coverage.  Ghoddousi acknowledged he was aware of the many problems that arose during the development.  Nevertheless, Ghoddousi argued he not an intentional wrongdoer.  Further, he was unaware of his fiduciary duties and was inexperienced in the construction industry.  Therefore, he could not have the subjective intent to cause property damage.

    The evidence showed, however, that Ghoddoussi was fully aware of the problems that arose during the development of the condominiums.  His declaration stated, among other things, the general contractor failed to supervise the framing and mistakes were made in installation of siding and framing.  As a result, Ghoddoussi had a thorough understanding of the problems that arose during the development stage, but chose to ignore them.  Therefore, the damage was "expected or intended" from the standpoint of the insured, precluding coverage.

Coverage Denied for Subcontractor's Defective Work

    Coverage for a subcontractor's defective work was the issue presented in Westfield Ins. Co. v. Sheehan Constr. Co., No. 08-3463, 2009 U.S. App. LEXIS 9021 (7th Cir. April 29, 2009). 

    Moisture problems were found in a residential subdivision for which Sheehan was the general contractor.  An investigation determined defective work by one of Sheehan's subcontractors caused the problem.  In the underlying suit, Sheehan settled for $2.8 million and then sought indemnity from Westfield.  The district court found there was no coverage.

    The CGL policy did not cover property damage to a contractor's own work, denoted in the policy as "your work."  Sheehan argued the problem stemmed not from its work but from the subcontractor's work.  Further, the standard CGL form was revised in 1986 to remove subcontractors' work from the definition of "your work." 

    The Seventh Circuit agreed the standard form changed in 1986 by adding the phrase, "[t]his exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."  Sheehan, however, did not purchase a policy with this language.  It bought a policy that lacked the "does not apply to subcontractors' work" language.  Instead, Sheehan's policy defined "your work" to include, "[w]ork or operations performed by you or on your behalf."  Sheehan's premiums presumably reflected the difference in language.

    Thanks once again to my Damon Key colleague and fellow blogger, Robert Thomas (inversecondemnation.com), for sending me this case.

Veternarian Entitled to Defense Under Liability Policy

    A veterinarian was entitled to a defense under his Veterinarian's Professional Liability Policy when sued for testimony given in an animal cruelty proceeding.  See Centennial Ins. Co. v. Patterson, No. 08-1521, 2009 U.S. App. LEXIS 8402 (1st Cir. April 23, 2009).

    The insured was sued with eighty other defendants by Carol Murphy.  Ms. Murphy's suit was based on the insured's alleged testimony against her at an Animal Possession Hearing and his alleged examination of her animals in connection with those proceedings.

    The insured sought a defense from Centennial, which denied the claim and filed suit for declaratory relief.  Centennial argued it had no duty to defend because the Murphy complaint did not allege a "veterinary incident."  The policy defined "veterinary incident as "any malpractice, negligent act or omission, utterance, or publication of a libel or slander, or other defamatory or disparaging material . . . in the furnishing of professional veterinary services."  The district court found Centennial had a duty to defend.

    The First Circuit affirmed.  The underlying complaint contained several allegations of wrongful conduct that could potentially be construed as negligence or malpractice.  For example, Murphy alleged the insured "testified two calves that died expired because they had no food and water."  Murphy's's allegations suggested the insured not only testified against her, but performed some type of professional veterinary service on the animals which Murphy regarded as wrongful and without her authorization. 

    Centennial also argued it was relieved of its duty to defend by an exclusion for any suit arising out of "any actual or alleged dishonest, fraudulent, criminal, malicious act or malicious omission" or any "willful violation" by the insured.  Centennial contended there was no potential that the insured's alleged conduct did not involve a dishonest, fraudulent, criminal, malicious act, or malicious omission.   Murphy's conclusory allegations claimed the insured committed various crimes, such as racketeering and perjury, which if proved, would fall within the exclusion.  Nevertheless, it was not necessary that all claims against the insured raise the possibility of coverage to trigger the insurer's duty to defend. 

Fifth Circuit Finds Flood Exclusion Ambiguous in Excess Policy

    A mixed result for the insured and excess insurers was reached in Six Flags Inc. v. Westchester Surplus Lines Ins. Co., No. 08-30476, 2009 U.S. App. LEXIS 8273 (5th Cir. April 21, 2009)[here].  Although the Fifth Circuit determined most insurers had no further coverage obligation, the flood exclusion in one excess policy was found ambiguous.

    Six Flags operated a theme park in New Orleans.  Six Flags had multi-layers, all-risk first-party coverage arranged as follows: (1) a primary layer with $25 million in limits; (2) a first excess layer with $125 million in limits; (3) a second excess layer with $125 million in limits; and (4) a third excess layer with $250 million in limits.  Six Flags paid an annual premium of $5.7 million for this coverage.

     The Excess Insurers covered all risks, subject to certain limits.  The policies' Flood sublimit was "applicable to all loss or damage . . . per occurrence and in the term aggregate as respects Flood at any location in a Flood Zone A or V" as designated by FEMA.  The provision limited coverage for the first-layer excess policies to $2,500,000.  Six Flags' theme park was located in a Flood Zone A. 

    Finally, the polices lumped together all loss within a 72-hour window within a Weather Cat Occurrence which was defined as "All loss or damage occurring during a period of 72 hours which is caused by . . . [a storm named by the National Weather Service]."  Further, "storm" included all "weather phenomenon, . . . including, but not limited to Flood, wind, hail, sleet, tornadoes, hurricane or lightning." 

   One excess policy issued by Commonwealth Insurance replaced the definition of Flood with an endorsement defining Flood as "loss or damage caused by waves, tidal water or tidal wave, overflow of . . . bodies of water. . . all whether driven by wind or not." 

    After Hurricane Katrina caused extensive damage to its park, Six Flags submitted losses totaling $150 million to its insurers.  The primary-layer insurers paid $25 million, exhausting this level of coverage.  The Excess Insurers then capped their coverage at $2.5 million pursuant to the Flood sublimit. 

    Six Flags sued, arguing the Flood sublimit did not apply because of a separate peril of a Named Storm.  The district court granted summary judgment to the insurers, concluding the Flood sublimit was unambiguous and excluded excess coverage. 

    On appeal, the Fifth Circuit first analyzed the non-Commonwealth Excess policies.  Six Flags argued the Flood sublimit did not apply to Flood loss in a Weather Cat Occurrence because a Named Storm was a distinct peril not subject to the Flood sublimit.  In other words, the Weather Cat Occurrence subsumed all of the other perils defined and was subject only to sublimits expressly addressed to it.  The Fifth Circuit disagreed. The Flood sublimit clearly capped the liability of the Excess Insurers at $2.5 million for all loss or damage per occurrence, including a Weather Cat Occurrence, as respected Flood.     

    Turning to the Commonweatlh Policy, Six Flags argued the "Flood" definition endorsement clarified for the Commonwealth Policy and the other Excess Policies that Flood caused by the peril of a Named Storm was not considered in the application of the Flood sublimit.  The Fifth Circuit determined the Flood definition endorsement ambiguous.  A reasonable reading of the Commonwealth endorsement meant it excluded the applicability of the Flood sublimit to Flood that was caused by the peril of a Named Storm.  Therefore, the district court's order granting summary judgment to Commonwealth was reversed.

    Finally, Six Flags argued the definition of Flood in the non-Commonwealth policies should be read in light of the definition contained in the Commonwealth Flood definition endorsement.  The Fifth Circuit declined to modify the non-Commonwealth Policies to find an ambiguity. Under Louisiana law, the policies had to be reviewed as independent units.