Insurance Law Hawaii

Exception to Insured Contract Does Not Apply in Construction Defect Case

    In Century Surety Co. v. Hardscape Construction Specialties Inc., No. 06-10930 (5th Cir. Aug. 7, 2009) [here], the court considered whether the exclusion for assumed liability under a contract was applicable.

    Hardscape contracted to construct a swimming pool facility for Hillwood Residential Services, L.P.  Hardscape agreed to indemnify and hold Hillwood harmless from any liability arising out of the construction.  Hardscape contracted with its sub-contract, Elite Concepts, to construct the swimming facility pools.  The Hardscape-Elite contract provided Elite would be bound to the Contractor (Hardscape) according to the same terms and conditions as the Contractor was bound to the Owner under the construction contract.

   Elite had a CGL policy with Century Surety Company.  The policy excluded "'property damages' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement."  Excepted from the exclusion were contractual obligations to pay for another party's tort liability or an insured contract. 

    After completion of the swimming pool, Hillwood sued Hardscape and Elite, alleging that faulty design and construction caused physical and aesthetic damage to the pool.  Hardscape demanded that Elite defend and indemnify.  Elite forwarded the demand to Century, who failed to respond.  When Century sued Hardscape and Elite, the district concluded there was no coverage.

    The Fifth Circuit affirmed.  Initially, the Court agreed that under Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W. 3d 1 (Tex. 2007), allegations of unintended construction defects may constitute an "accident" or "occurrence" under a CGL policy.  Therefore, the Century policy's "occurrence" terms covered the underlying suit.

    In determining whether Elite's assumed liability was an insured contract, the Court noted the exclusion's exemption only applied if the underlying complaint alleged a tort cause of action against Hardscape.  To fall within the exclusion's exception, the underlying suit had to make specific factual contentions that could constitute "a liability that would be imposed by law in the absence of any contract or agreement."  Therefore, the Court had to focus on the difference between common law tort and contract causes of action.

    The Court determined that the allegations were easily classified as giving rise to contract claims.  The damages occurred only to the subject matter of the Hillwood-Hardscape contract and no liability arose independently of the contract.  Hillwood made contract claims when it alleged that Elite's failure to properly design and construct the pools caused cracks in the walls and floor of the pool, aesthetic damage, pool structural damage, etc.  Similarly, the need to identify, diagnose, and correct the design and construction defects gave rise only to contract claims.

Insurer's Computer-Generated Summaries Admissible as Business Record

   The Ninth Circuit held an insurer's computer-generated summaries of payments were admissible as a business record in U-Haul International v. Lumbermens Mutual Cas. Co., No. 07-16187, 2009 U.S. App. LEXIS 17889 (9th Cir. Aug. 12, 2009).

   U-Haul had a primary policy with Republic Western up to a total limit of $7,000,000 per occurrence in excess of $25,000 in self-insurance.   An excess policy from Lumbermens became payable when the $25,000 self-insurance and $7,000,000 from the Republic Western policy were exhausted. 

   U-Haul settled three claims implicating these policies.  Republic Western and Lumbermens defended and paid settlement costs, but agreed under a reservation of rights to later address issues as to each party's coverage obligations.  A central issue was whether investigation, negotiation, and defense costs paid by Republic Western should be considered in determining whether its policies had been exhausted. 

   Republic Western sued Lumbermens.  After granting summary judgment to Republic Western on several issues, the district court held a bench trial to decide the amount Republic Western had paid on each claim.  This would determine when Lumbermens' excess policy was triggered and how much Lumbermens would be required to pay.

   At trial, a Republic Western claims manager, Thomas Matush, testified about exhibits which contained computer-generated summaries of payments for loss adjustment expenses made by Republic Western on the claims.  Lumbermens objected to the exhibits, arguing they were inadmissible hearsay and not subject to the business records exception in FRE 803 (6).  Further, Lumbermens argued the summaries were not properly authenticated pursuant to FRE 901.  The district court admitted the exhibits and entered judgment in favor of Republic Western in the amount of $1.9 million.

   On appeal, the Ninth Circuit affirmed.  Evidence compiled from a computer database was admissible as a business record, provided it met the criteria of Rule 803 (6).  Here, the exhibits summarizing loss adjustment expense payments for each claim fit squarely within the business records exception.  Matush testified that Republic Western employees input a record of each loss adjustment expense payment into a database at the time each payment was made.  Republic Western employees would then query the database to compile the payment information, generating a summary of the defense costs for each of the claims. 

   Further, the computer summaries were properly authenticated under Rule 901.  "Evidence describing a process or system used to produce a result and showing that the process or system produces an accurate result" was an example of a method of authenticating a process or system under Rule 901 (b)(9). The description of the process used to create the summaries was sufficient to authenticate the evidence. 

State of Insurance Industry in Hawai`i

   I was flying home from the mainland Monday and missed this article by Hawai`i Insurance Commissioner J. P. Schmidt in yesterday's Island Voices section of the Honolulu Advertiser.  Commissioner Schmidt states much of what he shared with the Insurance Practice Group of the Hawai`i Bar Association in July [see post here].  According to the Commissioner, the Insurance Industry continues to be alive and well in Hawai`i

Choses-In-Action Transferred to Successor Despite Anti-Assignment Provision

   In Pilkington N.A. Inc. v. Travelers Cas. & Sur. Co., No. 3:01CV7617, 2009 U.S. Dist. LEXIS 67291 July 27, 2009), the District Court determined there was coverage for a corporate successor under the predecessor's CGL policy after an asset transfer.  We previously reviewed here various cases addressing the impact of the anti-assignment provision in CGL policies, including the Ohio Supreme Court's response to the District Court's certified questions in Pilkington.

   Pilkington North America, Inc. sought coverage for environmental damage resulting from glass manufacturing by its predecessor, Libbey Owens Ford Company [LOF], prior to 1986.  The insurers had issued policies to LOF prior to 1986.

   In 1986, LOF entered a Transfer and Assumption Agreement [TAA] with a new wholly-owned subsidiary, LOF Glass, and transferred to LOF Glass the assets and liabilities of its glass division.  A month later, LOF entered into a Stock Exchange Agreement [SEA] with Pilkington Holdings, Inc.  As part of the SEA, LOF Glass transferred its corporate name to Pilkington Holdings.  The company was later known as Pilkington North America ("Pilkington").  The issue was whether any choses in action (the right to bring an action to recover money) regarding insurance coverage for pre-existing environmental liabilities transferred from LOF to Pilkington in the 1986 transactions? 

   In 2005, the District Court certified questions to the Ohio Supreme Court, including whether the policies' anti-assignment clauses barred acquisition by Pilkington of the choses in action?  The Ohio Supreme Court responded that a chose in action was transferable as to the duty to indemnify despite the anti-assignment provision .   See Pilkington N. Am. Inc. v. Travelers Cas. & Sur. Co., 861 N.E. 2d 121 (Ohio 2006). 

   Subsequent to the Supreme Court's ruling, the parties renewed their motions for summary judgment before the District Court.  Pilkington argued that under the TAA, LOF transferred all of its choses in action arising from the glass business to Pilkington. The insurers argued that the TAA did not effectuate a transfer of choses in action from LOF to Pilkington.  Therefore, only LOF could seek coverage for any liabilities resulting from the pre-1986 operations.

   The District Court determined the TAA transferred all of the choses in action from LOF to Pilkington.  The TAA stated that LOF would "convey, assign, transfer and set over to Pilkington all of LOF's right, title and interest in and to all of the rights and property."  Because under Ohio law choses in action arising under an insurance policy were transferable as assets even if the policy contained an anti-assignment clause, the TAA transferred assets from LOF to Pilkington, including the choses in action at issue in this case.

Notice Pursuant to Builder's Risk Policy Adequate Even After Damage Discovered

    Whether the contractor gave timely notice of loss to the carrier was the issue before the Eighth Circuit in The Weitz Co., LLC v. Lloyd's of London, No. 08-2835, 2009 U.S. App. LEXIS 17222 (8th Cir. Aug. 4, 2009) [here]. 

    In January 2001, H. Group hired Weitz as general contractor to build a luxury retirement community.  H. Group agreed to purchase an "All Risks" property insurance policy that protected Weitz's interests in work at the project.  The policy provided that any loss or damage was to be reported in writing as soon as practicable after it became known to H. Group's risk management department.  H. Group had to pay a $250,000 deductible for any covered loss.

    Severe rains caused water damage to the project in June 2002.  H. Group's representatives, Tim Reidy and Juan Rodriguez, visited the property soon thereafter and discovered the water damage.  Neither Reidy nor Rodriguez informed H. Group's risk management department of the damage, however.  In December 2002, Weitz sent a letter to Reidy, making a claim for water damage against H. Group's carrier.  Reidy forwarded Weitz's notice of water damage to the claims adjuster named in the policy.  H. Group's risk manager was copied on the letter to the claims adjuster.  Hence, both the insurer and H. Group's risk management department first received notice of the loss on the same day.

    After discussions with H. Group, the claims adjuster determined that the policy did not cover the water damage because of improper construction and failure to protect the property.  H. Group then informed the insurer it no longer wished to pursue the claim, but never informed Weitz.  Because the insurer denied the claim, Weitz suffered the entire loss of $3.4 million under the terms of the construction contract and H. Group owed nothing.

    Weitz sued, but the district court granted summary judgment to the insurer because Weitz did not give notice to the insurer as soon as practicable after the loss became known.  The Eighth Circuit reversed.  Contrary to the district court's holding, notice of loss was given as soon as practicable after it became known to the insured's risk management department, as required by the policy.  Timeliness of the notice was measured from when H. Group's risk management department became aware of the loss, not when Weitz or other H. Group personnel discovered the damage.  Although the insurer argued this interpretation would produce an absurd result whereby Weitz could delay for years giving notice to H. Group's risk management department, the Court responded the insurer could have drafted different language in its policy.

    

Insured's Complaint Against Agent Survives Motion to Dismiss

    Plaintiffs thought their agent, Scott Management Team, had secured flood insurance under their Allstate policy.  See Demouy v. Allstate Ins. Co., No. 06-9629, 2009 U.S. Dist. LEXIS 66254 (E.D. La., July 20, 2009).  After Hurricane Katrina struck plaintiffs' home, Allstate denied coverage because plaintiffs did not have a flood insurance policy.

    Plaintiffs sued Allstate and Scott, alleging Scott breached its fiduciary duty by failing to inform or advise plaintiffs that they were not covered for flood. Scott moved to dismiss, arguing the suit was untimely because it was not filed within one year after the date of discovery "of the alleged act, omission or neglect" by the insurance agent, as required by statute.  Without supporting evidence, Scott maintained that the limitations period began to run when plaintiff first attempted to make a claim shortly after Hurricane Katrina hit.

    Scott's motion was denied without prejudice.  Nothing in the record showed plaintiffs had constructive or actual knowledge of the agent's alleged act or omission.  Construing the facts in favor of plaintiffs, it was possible that plaintiffs could still come within the statute of limitations period. 

No Duty to Defend Registered Security Dealer Against Uncovered Claims

    Plaintiff was a registered representative with Legacy Financial Services.  See Ganim v. Columbia Casualty Co., No. 08-3945, 2009 U.S. App. LEXIS 16174 (6th Cir. July 23, 2009)[here].  Columbia insured Legacy and agreed to defend Legacy's registered representatives for negligence in "rendering or failure to render Professional Services."  Coverage was limited to "investment advisory services" and the "sale or attempted sale of or servicing of securities . . . approved by Legacy."  Claims involving products or services not approved by Legacy and/or registered with the SEC were excluded.

    Plaintiff was sued by Vincent Santalucia after a business venture between them soured.  Santalucia alleged plaintiff promised his "one stop" financial services business, "Carlyle Entities," was a good investment.  Based on this advice, Santalucia poured his money into Carlyle, an amount in excess of $500,000, which was subsequently deleted by poor investment decisions.  Columbia defended under a reservation of rights and the case ultimately settled.

    Santalucia then filed a claim for arbitration before the National Association of Security Dealers.  Columbia refused to defend in the arbitration.  Columbia asserted that because Santalucia's interest in Carlyle was neither a registered security nor a product approved by Legacy, his claim against plaintiff did not trigger a duty to defend.

    Plaintiff then sued Columbia.  The district court granted Columbia's motion for summary judgment on all of plaintiff's claims.

    On appeal, plaintiff argued that based on Santalucia's allegations, the claim could potentially fall with the scope of coverage.  The Sixth Circuit disagreed.  Columbia's policy limited coverage to investments that were approved by Legacy and were SEC registered securities.  The district court properly concluded that Santalucia's allegations described how plaintiff solicited him to invest in plaintiff's own financial services business, Carlyle, and that relying on plaintiff's advice, Santalucia continued to put money into Carlyle.  Plaintiff admitted that all of the losses for which Santalucia was seeking recovery stemmed from recommendations plaintiff made to invest in Carlyle.  Thus, all of the alleged wrongdoings were specifically excluded from coverage under the policy and could not "potentially" fall within it.

What if Mortgagor Fails to Pay Flood Insurance Premiums?

    If you assume your mortgage company will pay your flood insurance premiums, is the mortgage company liable for damage to property after failing to pay such premiums?  In Burks v. Prudential Ins. Co. of North Am., 2009 U.S. Dist. LEXIS 65451 (E.D. La. July 29, 2009), the court answered "no."

    Burks purchased her property in June 2003 and entered a mortgage agreement with Principal Mortgage, Inc.  Burks also purchased a Standard Flood Insurance Policy pursuant to the National Flood Insurance Program.  Prudential was the "Write Your Own" private insurance carrier for the flood policy.  The mortgage agreement provided for Burks to insure the property against certain losses.  Burks alleged she arranged for her flood insurance premium to be paid through her mortgage company, Principal Mortgage.

    Burks' property was damaged by Hurricane Katrina.  She thereafter learned that Principal Mortgage and its successor, CitiMortgage, failed to insure that her mortgaged property against flood.  Although CitiMortgage had been previously dismissed, Principal Mortgage had not.  Burks now argued Principal violated its fiduciary duty to her by altering and/or abandoning the policy and failing to procure flood insurance.

    CitiMortgage moved for summary judgment, arguing the undisputed facts established that Principal, like its successor-in-interest CitiMortgage, had no duty to Burks to procure or maintain flood insurance.  The mortgage agreement did not require flood insurance and made the home- buyer responsible for any policies issued.     

    The district court granted CitiMortgage's motion.  The rights, duties and obligations were defined by the mortgage agreement.  The mortgage agreement did not require flood insurance because the property was not in a special flood hazard area as defined by statute.  Therefore, the mortgage company had no duty to procure or pay for flood insurance.  Instead, the mortgage agreement placed responsibility for procuring flood insurance on Burks.  The court's prior dismissal of all flood related claims against CitiMortgage was dispositive of any attempted claims against Principal as predecessor-in-interest.

Hawai`i Life and Disabilty Insurance Guaranty Association

     A client's inquiry caused me to review the Hawai`i Life and Disability Guaranty Act ("Guaranty Association Act").  Haw. Rev. Stat. 431:16-201 to 219.  Here is a summary of Hawai`i's statute.

 

1)  Purpose of Statute.

 

     The statute seeks to protect persons against the failure of life and accident and health or sickness insurance policies and annuity contracts because of impairment or insolvency of the insurer.  Haw. Rev. Stat. 431:16-201.  To provide such protection, an association of insurers is created to pay benefits and to continue coverages as limited by the Act.  Members of the association are subject to assessment to provide funds to carry out the purpose of the litigation.  Haw. Rev. Stat. 431:16-202.

 

   2)  Operations of Hawai`i's Life and and Disability Insurance Guaranty Association.

 

  In order to be licensed to sell life, accident and health insurance in Hawai`i, an insurer must be a member of the Hawai`i Life and Disability Insurance Guaranty Association.  Haw. Rev. Stat. 431:16-206. 

 

     If an insurance company becomes insolvent, its obligations are taken over and paid through a variety of methods.  Most importantly, the Association has the power to collect assessments from other insurers.  Haw. Rev. Stat. 431:16-202.  If a member becomes insolvent, money to continue coverage and pay claims is obtained through assessments of other members.  Haw. Rev. Stat. 431:16-209 (b)(2). 

 

     The Association can also seek to have a financially sound insurer take over a troubled company's policies and continue providing coverage and paying claims.  Haw. Rev. Stat. 431:16-208 (a)(1); (c).  In addition, the Association is empowered to continue collecting premiums from policy holders, which, if unpaid, can relieve the Association of having to provide further coverage.  Haw. Rev. Stat. 431:16-208 (f)-(g).  The Association can also change the premium rate in accordance with the amount of insurance provided and the age and class of risk, subject to approval by the Insurance Commissioner or the Court.  Haw. Rev. Stat. 431:16-208 (d)(6).  Further, the Association has the ability to borrow money to provide coverage and pay claims.  Haw. Rev. Stat. 431:16-208 (n)(3). 

 

   Other safeguards the Guaranty Association has in its arsenal are as follows:

• There are statutory limits on the amount the Guaranty Association can pay to policyholders of insolvent insurers.  Haw. Rev. Stat. 431:16-203 (c). For example, the Guaranty Association is liable for life insurance death benefits up to $300,000.
• Subject to Court approval, the Guaranty Association can impose permanent policy or contract liens in connection with any guarantee, assumption or reinsurance agreement if the amounts which can be assessed are less than the amount needed or if the economic or financial conditions of member insurers are sufficiently adverse to justify such liens to be in the public interest. Haw. Rev. Stat. 431:16-208 (i)(1).
• The Guaranty Association can require an assignment to it of rights and causes of action by any insured as a condition precedent to the receipt of any right or benefits conferred in such person under the statute.  Haw. Rev. Stat. 431:16-208 (m)(1).
• When the maximum assessment that can be made is insufficient to cover anticipated claims, the Guaranty Association can allocate the limited funds it has among various claims. Haw. Rev. Stat. 431:16-209 (e).
• Any member insurer can determine its premium rates based on an amount reasonably necessary to meet its assessment obligation under the Guaranty Association Act. Haw. Rev. Stat. 431:16-209 (g).
• If an order of liquidation is entered, the receiver can recover on behalf of the insurer from any affiliate that controlled it, all distributions made in the previous five years unless the recipient could not have known that the distribution might adversely affect the ability of the insurer to meets its obligations. Haw. Rev. Stat. 431:16-214 (f)(1)-(2).
• The Guaranty Association may work with other state guaranty associations to develop an overall plan to provide protection for a failed insurer's policyholders. Haw. Rev. Stat. 431:16-208 (o).

   3)  Managing the Association's funds.

 

     The Guaranty Association does not exist to hold and invest funds.  When funds are needed to cover for an insolvent insurer, they are raised through assessments.  However, there are small amounts held by the Guaranty Association from prior assessments.  These funds are deposited with the First Hawaiian Bank, which manages the account.

 

 

Insured's Claim for Workers' Compensation Benefits Survives Summary Judgment

  Whether the insured was acting within the course and scope of his employment contract was at issue when the Eighth Circuit Circuit reversed the District Court's determination of no workers' compensation coverage in Merriam v. National Union Fire Ins. Co. of Pittsburgh, Pennsylvania, No. 08-3547, 2009 U.S. App. LEXIS 15698 (8th Cir. July 17, 2009).

    In 2004, the insured contracted to become a truck driver and independent contractor for Landstar Ranger, an interstate trucking company.  The contract required the insured be covered under a workers' compensation policy.  Accordingly, the insured secured a Contractor Protection Plan (CPP) from National Union.  The policy allowed recovery for occupational accident  benefits at $1,000,000 per accident and nonoccupational accident benefits at only $7,500.  "Occupational" accident was defined as one which "occurs or arises out of or in the course of the Insured Person performing services within the course and scope of contractual obligations to the Contractee (Landstar)."

    The insured was performing a run from Sparks, Nevada to Cedar Rapids, Iowa, when he stopped at his home in Boone, Iowa for a mandatory federal Department of Transportation break.  He noticed his gravel driveway had a sinkhole, making it impossible to park his truck.  The insured used his own dump truck to lower gravel into the sinkhole.  When he was unable to put the bed of the dump truck into neutral, he reached under the truck bed to see whether a cable had caught.  The truck bed fell on him, causing serious injury.

    Aware the insured was injured while using a personal vehicle, National Union determined the accident was nonoccupational-related and issued benefits of only $7,500.  The insured sued for breach of contract and bad faith.  The District Court granted summary judgment to National Union.  The District Court reasoned that Landstar could not have reasonably foreseen that plaintiff's act of fixing a personal vehicle would fall "within the course and scope" of his contractual duties to haul cargo for Landstar. 

    The Eighth Circuit disagreed.  The insured's decision to take his mandatory break at his home and to fill the sinkhole with gravel so he could park in his driveway could be viewed as attempting to fulfill specific contractual obligations to Landstar.  These acts helped ensure the load was delivered with diligence, speed, and care.  The insured's actions, therefore, fell within "the course and scope" of his obligations to Landstar under the independent contractor agreement.  If the accident occurred as the insured claimed, it was "occupational" as defined by the policy.  Therefore, summary judgment was premature.

    The Eighth Circuit affirmed dismissal of the bad faith claim, however. National Union engaged in more than a cursory investigation into the claim.  The claim was fairly debatable and National Union had an objectively reasonable basis for its denial.