Insurance Law Hawaii

Ambiguous Endorsement Means Insurer Must Defend Additional Insureds

   An ambiguous endorsement on the scope of coverage for additional insureds meant the insurer had a duty to defend.  See Ames Const., Inc. v. Intermountain Indus., Inc., 2010 U.S. LEXIS 41588 (D. Mont. April 28, 2010).

   Ames was the general contractor on a project to expand and upgrade the Missoula Wastewater Treatment Plant.  Intermountain supplied gratings to Ames for the project. In the parties' contract, Intermountain was required to secure insurance naming Ames as an additional insured.  Intermountain purchased a CGL policy from Maxum Indemnity Company and sought to add Ames as an additional insured.  The policy did not contain a Schedule listing the additional insureds.  Intermountain's agent, however, issued a Certificate listing Intermountain as the insured and Ames as the Certificate holder and additional insured.  The agent failed to provide a copy of the certificate to Maxum.

   An employee of the Wastewater Treatment Plant was injured when he fell from the grating installed by Ames and supplied by Intermountain.  The employee sued Ames, who tendered its defense to Intermountain and Maxum.  Coverage was denied because Maxum did not have a Certificate of Insurance listing Ames as an additional insured.

   The district court found the endorsement addressing additional insureds ambiguous for two reasons.  First, the endorsement's clause read, "Blanket as required by written contract and only if certificate of insurance has been provided to Company prior to date of loss."  It was unclear which entity was intended to be the "Company" Maxum, Intermountain, or Ames.  Maxum argued because the policy stated that "'we', 'us' and 'our' refers to the Company providing this insurance," the policy defined "Company" as Maxum.  But the policy relied on the undefined word "Company," rather than using Maxum's own definitions.

   The policy was also ambiguous as to what type of coverage it offered to an additional insured.  The policy provided blanket coverage, but also coverage to "an insured person or organization shown in the Schedule."  There was no schedule attached to the policy, however,.  Therefore, it was ambiguous whether the policy offered blanket coverage or coverage pursuant to a separate schedule.  Consequently, Ames was an additional insured.

"Cost of Replacement" Does Not Cover Purchase of New Home When Insureds Plan to Rebuild Damaged Home

   Determining the "Cost of Replacement" of the insureds' home was before the court in Nunez v Allstate Ins Co., 2010 U.S. App. LEXIS 8362 (5th Cir. April 20, 2010). 

   The insureds' home in Louisiana was destroyed by Hurricane Katrina.  The insureds received flood policy limits of $75,000 for structural damage and $30,000 for contents.  Under the homeowner's policy, Allstate paid $19,856.08 for wind-related structural damage to the house. 

   After the hurricane, the insureds moved to Houston and used the money received from Allstate to purchase a new home for $172,000.  Meanwhile, the insureds gutted their Louisiana house, elevated it and patched the roof.  In a deposition, the insureds stated they intended to repair and someday return to the property.   Additionally, the insureds received money from a Louisiana state program after stating they intended to keep their Louisiana home.

   The insureds sued Allstate, alleging Allstate only made partial payments for the damage caused by wind and wind-driven rain.  Allstate moved for summary judgment, contending that because the insureds did not repair or replace their property, their recovery was limited to the actual cash value of the property.  With an actual cash value of $113,914, less the recovery under the flood policy, the insureds had already been paid for the damage to the home. 

   The insureds argued that the policy provided for replacing the damaged building through purchase of an existing structure.  They claimed that the purchase of the Houston home replaced the insured property, and that it was irrelevant that they intended to someday return to their Louisiana property.  Allstate responded that the insureds did not replace their Louisiana property because they gutted it, elevated it and patched the roof.  Further, purchase of the Houston home was not a replacement of their damaged home because they accepted funds from Louisiana based on their statement they intended to someday repair and return to their original home.

   The policy did not define the term "replace."  The common meaning of the word, however, was "to place again, restore to a former place position, or condition."   Under this plain meaning, the insureds' purchase of their Houston home did not constitute a substitute or replacement under the policy.  Accordingly, the insureds could not recover under the replacement provision.

Hawaii ICA Finds Construction Defects Are Not Occurrences

   Ever since the Ninth Circuit made an Erie guess in Burlington Ins. Co. v. Oceanic Design & Constr. Inc., 383 F.3d 940 (9th Cir. 2004), that the Hawai'i appellate courts would find that construction defects do not constitute an occurrence under a CGL policy, coverage practitioners have waited for an answer.  Today, the Hawai`i Intermediate Court of Appeals did so, determining construction defect claims are not occurrences.  See Group Builders, Inc. v. Admiral Ins. Co., No. 29402 (Haw. Ct. App. May 19, 2010) [decision here].

   The case arises out of mold damage discovered at the Hilton Hawaiian Village's Kalia Tower.  The Tower was completed in May 2001.  In mid-2002, extensive mold growth was discovered in the guest rooms, forcing closure of guest rooms on floors 5 through 25.  An investigation revealed numerous construction defects in the Tower, some of which contributed to or caused the mold growth.

   Hilton filed suit in 2003 against numerous defendants, including the subcontractor responsible for insulation in the Tower, Group Builders.  Group was insured by Admiral.  When Group sought a defense for Hilton's suit, Admiral refused.  Group sued, but the circuit court concluded there was no evidence of property damage caused by an occurrence and granted Admiral's motion for summary judgment.

   On appeal, the ICA noted there was no dispute that the mold damage and resulting loss of use qualified as "property damage."  But was there an "occurrence" under the policy?  The policy defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."   

   Adopting the majority rule and confirming the Ninth Circuit's prediction in Burlington, the ICA held that breach of contract claims based on allegations of shoddy performance were not covered under CGL policies.  Further, tort-based claims, derivative of the breach of contract claims, were also not covered.

   This case is undoubtedly on its way to the Hawai`i Supreme Court.

Mandamus Petition for Appraisal Denied

   The insurer's right to compel an appraisal under the policy was addressed in In Re Capitol County Mut. Fire Ins. Co., 2010 Tex. App. LEXIS 3060 (Tex. Ct. App. April 27, 2010).

   Following Hurricane Ike, the insured submitted a claim for damage to her home to the insurer, Capitol County.  After determining the amount of loss, Capitol County made payment to the insured.  Several months later, the insured sued, asserting breach of contract and violations of the Texas Insurance Code.  Capitol County then invoked the policy's appraisal provision for resolving disputes over amount of loss.  The insured argued Capitol County waived its right to invoke appraisal. 

   Given the huge back load of Hurricane Ike cases, a Standing Order had been issued by the trial court, requiring that within 100 days of the insurer's appearance, the parties agree on a mediator and make a good faith exchange of information and documentation.  The trial court also entered an Appraisal Order, stating that before a motion to compel appraisal was set for hearing, the parties had to complete informal discovery and mediation pursuant to the Standing Order.  Capitol County did not move to set aside the Appraisal Order, but instead filed a petition for writ of mandamus in the appellate court, asking for an order compelling the trial court to vacate the Appraisal Order.  Capitol County argued that the Appraisal Order effectively rewrote the appraisal provision of the policy to require discovery and mediation as a condition precedent to appraisal.

   The appellate court denied relief.  Capitol County had never voiced any objection to the Appraisal Order before the trial court.  Had it done so, the trial court could have modified the Appraisal Order, if necessary. 

Relitigating UM Coverage in Hawaii Barred by Res Judicata

   Brown was injured when a passenger in a car on Kauai.  See Brown v. Progressive Direct Ins. Co., 2010 Haw. App. LEXIS 211 (Haw. Ct. App. May 5, 2010).  The driver of the vehicle in which Brown rode was uninsured.  The driver of the second vehicle involved in the accident fled the accident scene. 

   At the time of the accident, Brown was insured by two auto policies issued by Progressive.  Each policy provided UM coverage with a liability limit of $25,000 per person/$50,000 per accident.  Brown secured these policies as a resident of Nebraska.  The amount of the premiums paid was based on a Nebraska zip code. 

   Both policies had an "other insurance" provision which limited the total amount that could be recovered arising out of one accident to the highest limit of the available uninsured motorist coverage in any one policy.  Brown submitted claims and a settlement demand to Progressive for the maximum amount of UM benefits under both policies, or a total of $50,000.  Progressive, relying on the "other insurance' provisions, agreed to pay only $12,500 under each policy.   Brown argued that the "other insurance" provisions were invalid under Hawai`i law, which permitted the stacking of UM benefits under multiple policies.  Progressive contended that Nebraska law, which did not permit stacking, governed the policies.  In March 2007, Progressive sent two checks to Brown totaling $25,000, the maximum benefits permitted under the "other insurance" provision and Nebraska law.

   On March 14, 2007, Progressive filed suit for declaratory judgment against Brown in Nebraska.  Brown failed to answer and a default judgment was entered.  The default judgment found that Nebraska law governed the dispute and that Brown was not entitled to any further compensation from Progressive.

   Thereafter, on March 27, 2007, Brown filed a complaint against Progressive in Hawaii.  The complaint sought benefits of $25,000 under each policy, or a total of $50,000.  Brown's motion for summary judgment was granted by the Circuit Court.

   On appeal, the Intermediate Court of Appeals reversed.  Brown argued res judicata should not be applied by Hawai`i courts because Progressive never informed the Nebraska court that Brown's claims were made in Hawai`i, that his claims were be handled by a Hawai`i claims adjuster at Progressive's Hawai`i claims office, and that Brown was represented by counsel in Hawai`i.  Rejecting these arguments, the ICA found the full faith and credit clause of the U.S. Constitution and the doctrine of res judicata dictated that the Nebraska judgment barred the Hawai`i judgment as a matter of law.  

Hawaii Legislature Passes Insurance Related Bills

   The recently completed session of the Hawaii Legislature enacted six insurance-related bills.  We summarize each below.

   SB 2017 - Insurance Claims Adjusters; Crop Insurance

   The bill allows a claims adjuster who adjusts only workers' compensation claims or crop insurance claims to take an examination approved by the Risk Management Agency of the United States Department of Agriculture in order to qualify for a limited insurance adjuster's license.

   SB 2371- Limited Benefit Health Insurance

   Limited benefit health insurance will be excluded from the insurance code provisions covering accident and health or sickness insurance contracts, with certain exceptions.  This bill is not yet signed by the Governor.

   SB 2812 - Captive Insurance Companies

   This statute amends the frequency of statutorily required captive insurance company examinations from once every three years to once every five years, unless otherwise required by the Insurance Commissioner.  It also requires risk retention captive insurance companies to undergo examination within three years of formation.  Further, the bill requires protected cell accounts established by sponsored captive insurance companies to be operated only under the forms of business organizations authorized by the insurance commissioner.

   HB 1439 - Life Settlements; Life Insurance

   The Life Settlements Act is extended for five additional years.  The bill establishes a life settlements working group to study life settlement issues, including the definition of "insurable interest."  This bill has not yet been signed by the Governor. 

   HB 2028 - Group Life Insurance; Limits

   The insurance commissioner must approve the issuance of group life insurance policies that cover other than the listed groups.  The bill expands group disability insurance to include groups other than the listed groups.

   HB 2087 - Medicaid; Health Insurance; Payment

   Health insurers are required to promptly pay claims for services to medicate recipients by repealing the exemption for medicaid claims from the clean claims law.  The bill further requires the State to pay interest on delayed payments.  Expenditures from the hurricane reserve trust fund and matching American Recovery and Reinvestment Act funds are authorized.  This bill has yet to be signed by the Governor.

   The status of bills not yet signed by the Governor can be tracked at www.capitol.hawaii.gov/session2010.

Employer's Liabilty Exclusion Applies Equally to Additional Insured

   Whether an exclusion for coverage of bodily injury to an employee of "the insured" applied to an additional insured was the issue in James McHugh Construction Co. v. Zurich Am Ins. Co., 2010 Ill. App. LEXIS 318 (Ill. Ct. App. April 13, 2010).

   McHugh, the general contractor, hired JMS Electric, Inc. to design and build a electrical system on a construction project.  Pursuant to the agreement, JMS added McHugh as an additional insured under its general liability policy with Zurich.  During the construction, a McHugh employee was injured when he fell into a ditch utilized by JMS to install electrical components.  The employee sued JMS.  JMS filed a third-party complaint for contribution against McHugh alleging McHugh's negligence contributed to causing the employee's injuries. 

   McHugh tendered its defense to Zurich.  Zurich denied coverage because the policy excluded coverage for bodily injury to an employee of "the insured" arising out of and in the course of employment by "the insured."  McHugh argued it was "an insured" under the policy, but was not "the insured" under the exclusion because only JMS was "the insured."  Otherwise, McHugh argued, the term "the insured" in the exclusion was ambiguous.  The trial court disagreed and found no duty to defend.

   The Illinois appellate court affirmed.  The parties agreed that "an insured" referred to both the named insured and any additional insureds.  It made no sense to interpret "the insured" differently from "an insured."  The obvious meaning of "the insured" was "the insured seeking coverage."  Interpreting "the insured" to mean "the insured seeking coverage" meant that both the named insured and the additional insured were equally subject to the exclusion.   

Insured's Rejection of Counsel Relieves Insurer of Defense Obligations

   Check out today's postover at hawaiioceanlaw.com where my Damon Key colleague, Mark Murakami, discusses a Katrina-related case in which the insured refused to accept the insurer's choice of defense counsel.  The choice was risky because the Second Circuit relieved the insurer of having to pay defense costs.

Guest Post: Surety Bonds

   The following guest post on surety bonds is provided by Kevin Kaiser of Surety Bonds.com,  a nationwide bonding agency dedicated to educating people about surety bonds through their Surety Bond Education Program.  (http://www.suretybonds.com/edu/).  Five questions about bonds follow and are answered by Kevin.

   1)  What is a Surety Bond and How is it Different Than Insurance?

   This is probably the most common question asked regarding surety bonds because the bonds and insurance are both tools used for mitigating risk.  The tools are confused even further because surety bonds are sometimes referred to as “surety insurance”.

   It is important that users not confuse surety bonds with insurance because they are actually quite different. Surety bonds are a form of credit not unlike to paying interest on a bank loan. 

   To be completely technical, a surety bond is a three-way agreement where losses are unexpected. The monthly premium costs typically pay for pre-qualification services and cost associated with the underwriting of the bond.

   Think of a surety bond like this: you are a contractor and you just got a big job. But there might be unexpected circumstances that delay the completion of the job, so you obtain a surety bond. This bond protects the person who hired you in case the unexpected consequences become reality. If weather delays the construction of the road project you’re working on, the surety bond will cover the cost of completing the project, protecting the hiring party and providing incentive for you to be quick, but thorough.

   2)  Do I Need a Surety Bond for My Small Business?

   Most small businesses could stand to take advantage of surety bonds in some way, shape or form. Many businesses that require a license to operate will also require that you have a surety bond.  Some of the most common industries that require a surety bond are mortgage and insurance brokers as well as car dealers.

   3)  How Much Does a Surety Bond Cost?

   The surety bond cost will depend greatly on the type of bond and the credit of the person applying for it. With good credit you can get a bond for anywhere from .05% to 5%. With less than stellar credit you could end up paying 5 -15% of the total bond amount.

   4)  Do I Need to Annually Renew My Bond?

   Yes, most bonds will require that you renew the surety bond every year. Because there is so much variation in the types of bonds people need, the costs and requirements vary greatly.

    5) How Can I Get a Surety Bond?

   Surety Bonds are typically pretty easy to obtain. For most people with good credit an application is all that is necessary to obtain a bond of $25,000 or less. The application process works quickly and can typically be completed in 24 to 48 hours.  If there are multiple partners involved or cosigners, the process gets complicated and takes longer to complete.

 

Limitation Period Triggered When Policy's Conditions Met, Not When Damage Occurs

   The issue in Fabozzi v. Lexington Ins. Co., 2010 U.S. App. LEXIS 7040 (2nd Cir. April 6, 2010), was whether the limitations period for suit against the insurer was triggered when damage to the insureds' home occurred or when all the conditions precedent to filing suit had been met.

   When first issuing a policy for the insureds' home in 2001, Lexington was aware of the property's beach-front location.  The insureds first became aware of structural deterioration of their home during a renovation that began in 2001.  By April 2002, their house had to be propped up to prevent it from fully collapsing.  In May 2002, the insureds submitted their claim to Lexington.  A lengthy investigation commenced, which included requesting documents, obtaining an engineer's evaluation, and taking the insureds' oral examination. 

    After a two year investigation, Lexington denied coverage in July 2004, stating that the damage was excluded as "wear and tear, deterioration, inherent vice, latent defect, wet and/or dry rot, as well as earth movement."  

    The insureds sued.  Although the investigation took more than two years, the district court found the policy provision requiring suit that against Lexington be filed "within two years after the date of loss" had not been met. 

   On appeal, the insureds argued that the requirement to bring suit "within two years after the date of loss" meant the date on which all the conditions precedent to bringing a claim had been satisfied.  The Second Circuit canvassed relevant cases decided by New York courts.  Although some policies required suit be filed within a specified time frame "after the inception of the loss," the language in the insureds' policy tied the limitations period to the moment the claim accrued.

   Here, the district court did not consider what conditions were precedent to filing suit nor did it determine at what point a breach occurred.  Therefore, the case was remanded to the district court for consideration of when the insureds' claim accrued and whether the suit was timely.