Insurance Law Hawaii

No Duty to Defend Additional Insured's Own Negligence

   The issue in Pekin Ins. Co. v. Roszak/ADC. LLC, 2010 Ill. App. LEXIS 635 (Ill. Ct. App. June 25, 2010) was whether a duty to defend was owed to the additional insured when the underlying complaint did not allege any negligence by the named insured.

   An employee of Area Erectors, a subcontractor of the general contractor, Roszak, was injured at the construction site.  The employee sued Roszak and another subcontractor, Rockford Ornamental.  The complaint alleged Roszak participated in coordinating the work done at the site, but failed to reasonably inspect, supervise and control the work.  A second count based on premises liability alleged that Roszak controlled the construction site.  Both counts further alleged that as a direct and proximate result of Roszak's negligence, the plaintiff was injured. 

   The contract between Roszak and its subcontractor, Rockford, required Rockford to add Roszak as an additional insured to its CGL policy.  An endorsement to the policy identified an insured as any organization for whom the insured was performing operations.  However, the organization was an additional insured only with respect to liability incurred solely as a result of some act and or omission of the named insured and not for its own independent negligence.

   Roszak tendered the complaint to Rockford's insurer, Pekin Insurance.  Based on the endorsement, Pekin declined the tender from Roszak and refused to defend.  When Roszak sued for a declaratory judgment, Roszak argued that the underlying complaint raised the possibility of coverage and thus Pekin owed a defense.  The trial court denied Pekin's motion for summary judgment, but granted Roszak's motion for summary judgment on the duty to defend.

   The appellate court reversed.  The additional insured endorsement did not cover either count because direct allegations of negligence on the part of the additional insured was not the "result of some act or omission of the named insured."  Instead, the complaint alleged that the injury was caused by the additional insured's own independent negligence. 

   The court next assumed that Rockford was an independent contract of Roszak in the event the underlying complaint alleged negligence by Rockford.  Yet, even with this assumption, there was no duty to defend because nothing in the underlying complaint indicated Roszak retained sufficient control over the details of Rockford's work so as to be vicariously liable for the acts or omissions of Rockford. 

Insurer's Declaratory Judgment Action Regarding Insured's Lack of Cooperation Allowed to Proceed

   Should an insurer be allowed to pursue a federal action for declaratory judgment on its duty to defend where the insured has failed to cooperate in numerous underlying state actions against it?  The Fifth Circuit decided the district court erred in staying the declaratory judgment action and allowed the federal case to proceed simultaneously with the state cases.  See Medical Assur. Co. Inc. v. Hellman, 2010 U.S. App. LEXIS 12613 (5th Cir. June 21, 2010). 

   The insured doctor left the country with 350 medical malpractice claims pending against him.  Medical Assurance was defending the doctor in proceedings filed under the Indiana Medical Malpractice Act and in state court.  Under the statute, a medical review panel had to issue an opinion on every medical malpractice claim before the claim could be pursued in Indiana courts.  Only four of the 350 cases against the insured had moved from the review-panel stage to an actual lawsuit in state court.

   Medical Assurance's liability policy provided a duty to defend, but the insurer was relieved of those duties if the insured violated the policy's cooperation clause.  This clause committed the insured to, among other things, attend all meetings, hearings, depositions, and trials.  Medical Assurance sued in federal court, seeking a declaration that it had no duty to defend because the doctor had utterly failed to cooperate in the 350 pending cases.

   The district court stayed Medical Assurance's declaratory judgment action because the parallel state court proceedings were underway before Indiana's malpractice panels and courts.  The district court determined it would be impossible for Medical Assurance to show actual prejudice due to the lack of cooperation without interfering with the state proceedings. 

   The Fifth Circuit vacated the stay.  The purpose of the Declaratory Judgment Act was to facilitate efficient outcomes.  Here, that purpose would best be effected by allowing Medical Assurance to go forward with its federal case to determine its duty to defend.  The issue of whether lack of cooperation should relieve the insurer of its duty to defend was sufficiently distinct from the liability issues in the state proceedings that staying the federal action was an abuse of discretion. 

  

Policy Restricts Coverage Under Additional Insured Endorsement to Excess

  Two interesting issues were presented in Jeffrey M. Brown, Assoc., Inc. v. Zurich Am. Ins. Co., 2010 N.J. Super. LEXIS 108 (N.J. Super. Ct. App. Div. June 23, 2010).  First, what was the scope of coverage provided by an additional insured endorsement which provided the coverage was "excess over any other insurance?"  Second, could an additional insured endorsement which provided only excess coverage be construed to provide primary coverage if the policyholder contracted to obtain additional insurance that was primary coverage?

   The general contractor entered a subcontract with CAP Services to demolish a structure at a construction site.  The general contractor had its own CGL policy with Zurich.  But the subcontract required CAP to provide primary additional insured coverage for the general contractor.  CAP was already insured under a CGL policy issued by Interstate.  The policy included an additional insured endorsement which provided coverage that was "excess over any other insurance."  CAP never notified Interstate that it had entered a subcontract and Interstate never issued a certificate of insurance to the general contractor. 

   When employees of a subcontractor of CAP were injured at the job site, they sued the general contractor.  Zurich defended while Interstate argued it had no coverage obligations.  The general contractor and Zurich sued Interstate.  The trial court granted summary judgment against Interstate, finding that under the subcontract between the general contractor and CAP, the Interstate policy provided primary coverage.

   The appellate division reversed.  Interstate's policy was "excess" to any other coverage available to an additional insured such as the general contractor.  Zurich's policy made Interstate's coverage of the general contractor under its endorsement "excess."  Further, Interstate's policy did not commit to provide CAP with coverage for whatever additional insured coverage obligation CAP might later agree by contract to provide.  CAP could not expand the scope of coverage under the additional insured endorsement if it failed to notify Interstate of the terms of the subcontract obligation to provide additional insured coverage.

Insurer Must Indemnify When Water Damage Manifests During Policy Period

   The insurer defended the underlying construction defect case under a reservation of rights, but moved for summary judgment in the coverage action on its duty to indemnify.  Mid-Continent Caus. Co. v. Frank Casserino Constr., Inc., 2010 U.S. Dist. LEXIS 59363 (M.D. Fla. June 16, 2010). 

   The general contractor subcontracted with the insured to perform building wrap, vinyl siding, and roofing for two apartment building projects.  The buildings were completed in 1998.  In 2004, water damage was discovered.  The subcontractor's expert opined there were latent defects in the buildings that would have been discernible when the first measurable rains after construction was completed in 1998. 

   The subcontractor was insured under consecutive CGL policies from August 30, 1998 through August 30, 2002.  On the insurer's motion for summary judgment, the Court first noted that the "property damage" at issue concerned the physical damage to the buildings caused by water intrusion.  To determine whether the damage occurred during a policy period, coverage under Florida law was triggered when property damage manifested itself. 

   Here, the insured subcontractor had the burden of proving that "property damage" manifested prior to August 30, 2002, the last day on which the policies were in effect.  The insurer argued that the subcontractor's expert had no personal knowledge as to whether any damage from water intrusion was manifested during the policy period.  The court determined, however, that actually seeing the damage during the policy period was not required.  The only relevant question was whether physical injury to the buildings manifested itself during the period of coverage.  The insured's expert opined that it did.  There was sufficient, albeit perhaps disputable, evidence to support this opinion.  Accordingly, disputed issues of fact precluded summary judgment on the insurer's motion.

Pre-Existing Damage Exclusion Does Not Excuse Duty to Defend

   In a coverage dispute between two insurers, the court considered the impact of an endorsement excluding coverage for any loss that first manifested before the term of the policy.  See Pa. Gen. Ins. Co. v. Am. Safety Indemn. Co., 2010 Cal. App. LEXIS 981 (Cal. Ct. App. June 28, 2010).

   Whitacre Construction, a framing subcontractor, was insured under a CGL policy issued by Pennsylvania General Insurance Company from October 1998 through December 2001.  During this time period, Whitacre entered a subcontract and completed the work on a construction project.  Thereafter, Whitacre was insured by a CGL policy issued by American Safety Indemnity Company from December 2001 to December 2002. 

   Whitacre was sued in a construction defect case.  The alleged defects included ceiling deflection, walls that were not perpendicular to the floor, and window framing problems. Whitacre tendered the suit to both insurers.  Pennsylvania accepted the tender of the defense under a reservation of rights and ultimately paid the defense and settlement costs for Whitacre.  American declined the tender, asserting there was no possibility of coverage under its policy.  The underlying case eventually settled.

   Thereafter, Pennsylvania sued American, seeking equitable contribution for a portion of the defense and indemnity costs it paid.  The insurers disputed whether the damages allegedly caused by Whitacre first manifested during Pennsylvania's policy period. 

   American argued it was entitled to summary judgment because its policy covered only damages caused by an occurrence during the term of the policy, and expressly excluded coverage for any loss that first manifested before the term of its policy.  It was undisputed that Whitacre's work was completed before the effective date of American's policy.  Further, American argued the term "occurrence" in its policy referred to the underlying conduct that caused the resulting damage, rather than to the damage resulting from that conduct.  Occurrence was defined in the policy as,

[A]n accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance.  "Property damage"  . . . which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during, the term of this insurance.

Pennsylvania, however, argued that because there was potential coverage under both policies, it was entitled to contribution from American. 

   The trial court granted summary judgment to American.  The "occurrence" was the defective framing work performed by Whitacre which could arise no later than the time the framing work was completed.

   On appeal, the pivotal issue was whether American's policy clearly provided that two separate triggers of coverage - the causal acts by Whitacre and the commencement of damages resulting from those acts - must happen during the policy period before a potential for coverage existed.  American asserted its endorsement required that the occurrence cause property damage during the policy period before there was coverage.  Here, Whitacre's causal conduct did not happen during American's policy period.

   The California Court of Appeal disagreed with this analysis.  The policy language could reasonably be interpreted to mean that resulting damage, not the causal conduct, was still a defining characteristic of the occurrence that must take place during the policy period.  There was nothing in the endorsement stating that both the causal conduct and property damage must occur during the policy period.  Instead, the policy language was reasonably susceptible to the interpretation that the trigger of coverage was damage to property, not the causal conduct.  The facts on when the damage from the construction defects first commenced were in dispute.  Accordingly, the trial court erred in granting summary judgment to American.

   A couple of comments here.  First, although not discussed in the decision, California courts have determined that construction defects are occurrences which are covered by CGL policies.  See e.g., Pepperell v. Scottsdale Ins. Co.,, 73 Cal. Rptr. 2d 164 (Cal. Ct. App. 1998).  As noted in a prior post, the Hawaii Intermediate Court of Appeals recently went the other way, determining that construction defects were not occurrences, but are related to breach of contract.  Second, it is hard to imagine how the construction defects here (improper framing) could have manifested after Pennsylvania's policy period terminated.  There was no suggestion of continuing property damage caused by the construction defects.  So it seems logical that the property damage occurred no later than when the construction work was completed, i.e., during Pennsylvania's policy period.  Although the Court of Appeal noted there were disputed issues of fact regarding when the property damage first commenced, the nature of the property damage was not further explained.

Ninth Circuit Considers Timeliness of LHWCA Compensation Claim

   The Ninth Circuit covered a lot of ground in reviewing the Benefits Review Board's ("BRB") determination that the claimant was entitled to benefits in Hawaii Stevedores, Inc. v. Ogawa, 2010 U.S. App. LEXIS 12767(9th Cir. June 22, 2010).

   Ogawa was a storeroom maintenance clerk at the employer's marine terminal from 1977 to November 2002.  He enjoyed the work, but found it stressful.  He suffered a stroke in November 2002.  After six months of convalescing, Ogawa attempted to return to work.  In June 2003, Ogawa was medically retired. 

   Thereafter, believing that the job stress caused his high blood pressure and stroke, Ogawa filed a disability compensation claim under the Longshore Harbor and Workers Compensation Act.  After a hearing, the ALJ found Ogawa was temporarily disabled before March 15, 2005, and was permanently and totally disabled thereafter.  The BRB affirmed.

   On appeal, the employer asserted that the claim for compensation was untimely because it was not filed thirty days after the date of injury.  The Ninth Circuit noted that the LHWCA excused late notice where the employer was not prejudiced.  Here, the employer was aware of Ogawa's medical condition following the stroke because it had access to all of his medical records, his doctors, and Ogawa himself, who had submitted to five independent medical examinations over nearly four years.  Therefore, Ogawa's late notice was properly excused.

   Next, the court considered whether the employer had submitted substantial evidence that Ogawa's stroke did not arise in the course of his employment.  The LHWCA creates a presumption that a disabling injury is work-related and thus compensable.  This presumption may be invoked by the claimant upon a prima facie showing that: (1) he suffered a harm, and (2) a workplace condition could have caused the harm.  If the claimant successfully invokes the presumption at the first step, the employer may rebut the presumption at the second step by presenting evidence to sever the potential connection between he disability and work environment.  If the employer does so, the ALJ moves to the third step by weighing the evidence to determine whether the claimant has established the causal link between the injury and employment.

   Here, the ALJ mistakenly ignored the employer's evidence that the injury was not work related, giving more weight to Ogawa's evidence.  Although it was error for the ALJ to weigh the evidence and consider questions of credibility at the second step, it was harmless.  The ALJ's ultimate conclusion that the totality of the evidence showed a relationship between stressful work conditions and Ogawa's stroke was supported by substantial evidence. 

   Finally, the employer and Ogawa both argued that the ALJ erred in determining the date of Ogawa's maximum medical improvement (MMI), the date which triggers a change in the classification of a claimant's disability from temporary to permanent.  The ALJ set the MMI on March 14, 2005, two and a half years after the stroke.  The Ninth Circuit agreed that the ALJ's determination of the MMI was not supported by substantial evidence.  Although the ALJ expressed concern that the MMI testimony was speculative and unexplained, she did not take additional evidence on this point.

   Accordingly, the petition for review was granted in part on the issue of Ogawa's MMI date, but denied with respect to all other issues.

Colorado Court Asked Whether Construction Defect is an Occurrence?

   As we noted in a prior post, the Hawaii Intermediate Court of Appeals recently decided that construction defects do not constitute an occurrence under a CGL policy.  Citing the same Colorado Court of Appeals case that the Hawaii ICA found persuasive, the 10th Circuit certified a similar issue to the Colorado Supreme Court in Greystone Construction, Inc. v. National Fire and Marine Ins. Co., No. 09-1412 (10th Cir. June 2, 2010).

   The Hulls purchased a house built by Greystone Construction in June 2001.  Subcontractors were employed to build the house.  In November 2005, the Hulls sued Greystone, alleging damage to the house due to the subcontractor's negligent design of the soil-drainage and structural elements.

   Greystone sought coverage from National under its CGL policies.  National denied coverage, deciding that the construction defects were not an occurrence under the policies.  Greystone sued, but the district court granted summary judgment to National.  Relying on the Colorado Court of Appeals' decision in General Security Indemn. Co. of Arizona v. Mountain States Mutual Cas. Co., the district court determined the underlying complaint did not allege an "occurrence" under National's policy.

   On appeal, the Tenth Circuit noted that under Colorado law, the term "accident" as used in CGL policies meant a "fortuitous event."  Therefore, General Security determined that a claim for damages arising from poor workmanship, standing alone, did not allege an accident that constituted a covered occurrence.

   Nevertheless, the Tenth Circuit was uncertain of the status of Colorado case law because the Colorado Supreme Court had not defined the terms "accident" and "occurrence" as those terms were used in post-1986 policies.  Moreover, the policy at issue here had an exception to the exclusion for "your work" where the damage arose out of work performed by a subcontractor.  The Colorado courts had not considered how the coverage grant and subcontractor exception to the "your work" exclusion operated in conjunction with one another.

   Therefore, the Tenth Circuit asked the Colorado Supreme Court:

Is damage to non-defective portions of a structure caused by conditions resulting from a subcontractor's defective work product a covered "occurrence" under Colorado law?

Insurer Must Defend Under Policy Providing Excess and Umbrella Coverage

   Defense obligations under a policy containing umbrella and excess coverage were before the court in Legacy Vulcan Corp. v. The Superior Court, 184 Cal. App. 4th 285 (Cal. Ct. App. 2010).

   Vulcan manufactured and sold perchloroethylene.  The City of Modesto sued Vulcan, alleging that use of perchloroethylene by the dry cleaning industry had resulted in environmental contamination.  Vulcan tendered its defense to Transport Insurance Company. 

   Transport denied coverage and filed suit for declaratory relief.  The trial court concluded Transport's obligations were limited to those of an excess carrier and that the duty to defend did not arise until the exhaustion of a self-insured retention and all underlying insurance.

   The Court of Appeals disagreed, determining that Transport's policy provided both excess and umbrella coverage.  One clause granted coverage in excess of all underlying insurance, clearly providing excess coverage.  A second clause provided for coverage of claims "not within the terms of the coverage of the underlying insurance listed in Schedule A."  Under this clause, if the underlying insurance listed in Schedule A provided no coverage for a particular claim (as distinguished from coverage that had been exhausted), and the claim was within the scope of the Transport policy, the Transport policy covered the claim.  Accordingly, this second clause provided coverage for claims where the underlying policies specified in the schedule provided no coverage.  As a result, it provided umbrella coverage, which constituted primary coverage.  Consequently, there was a duty to defend under the umbrella clause.

   Further, the reference to "underlying insurance" in the first, excess clause was ambiguous.  The phrase could reasonably be interpreted to mean either the insurance listed in Schedule A only or all underlying insurance held by Vulcan.  Resolving this ambiguity in favor of the insured, the term "underlying insurance" as used in the first clause encompassed only the policies listed in Schedule A.

   Finally, the court considered whether the self-insured retention had to be exhausted before Transport's duty to defend arose.  The Court noted that the impact of an SIR on the duty to defend depended on the particular policy language.  In the absence of clear policy language, to require the exhaustion of an SIR before an insurer had the duty to defend would be contrary to the reasonable expectations of the insured to be provided an immediate defense in connection with its primary coverage.  Transport's policy stated that the duty to indemnify was limited to amounts in excess of the $100,000 retained limit, but did not state that the duty to defend such claims was limited by the retained limit in any manner.  Therefore, the duty to defend was not limited by the policy's SIR.

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

  

No Duty to Defend Additional Insured After Expiration of Franchise Agreement

   Marriott entered a franchise agreement with Columbia Hotels.  See Marriott Int'l, Inc. v. Amoco Ins. Co., 2010 U.S. Dist. LEXIS 53253 (W.D. Mo. May 28, 2010).  In the agreement, Columbia agreed to "indemnify, defend and save harmless Marriott against all losses, damages, claims, . . . arising out of . . . the Franchised Business."  Columbia's duty to indemnify Marriott would survive if the franchise agreement was terminated.  Finally, Columbia agreed to obtain a CGL policy naming Marriott as an additional insured.  Columbia purchased such a policy from AMCO with a policy period from April 3, 2007 to April 3, 2008.  The policy stated coverage ended when the franchise agreement was terminated.

   The franchise agreement was terminated on November 19, 2007.  The termination agreement stated the rights of Marriott and the duties and obligations of Columbia would remain in full force and effect and survive the termination date. 

   Five days after termination of the franchise, a Columbia employee was raped and murdered.  Her son filed suit against Marriott and others.  Marriott sought a defense from AMCO, which denied coverage.  Marriott then sued AMCO and Columbia.  Columbia cross-claimed against AMCO.

   The court initially determined that the indemnity provision should be interpreted under Maryland law.  Based upon Maryland's treatment of indemnity provisions, the franchise agreement did not cover Marriott for its own negligence.  Although the indemnity provision covered "all losses, damages, claims," etc., the parties did not use specific language manifesting an intent to cover Marriott's own negligence.  Without such language, the indemnity provision would not cover Marriott's own negligence. 

   Nor was Marriott entitled to coverage by AMCO as an additional insured.  The policy classified Marriott as an additional insured due to the franchise agreement with Columbia, but only for as long as the franchisee agreement lasted.  The franchise agreement ended five days before the rape and murder.  Thereafter, Marriott lost its protection as an additional insured.  Accordingly, Marriott was not entitled to coverage by AMCO as an additional insured.