Insurance Law Hawaii

CGL Exclusion for Auto Accidents Bars Coverage

   An exclusion under a CGL policy for bodily injury arising out of automobile accidents prevented coverage when an employee was at fault.  See Sprinkles v. Assoc. Indemn. Corp., 2010 Cal. App. LEXIS 1532 (Cal. Ct. App. Sept. 1, 2010).

   Bibinz, an employee of Sinco, caused the accident, killing the deceased.  The deceased's family sued, alleging that Sinco negligently hired Bibinz, an uninsured and undocumented alien with a lengthy criminal record.  Sinco had a commercial automobile policy issued by General Insurance with a policy limit of $1,000,000, an excess and umbrella policy issued by Fireman's Fund with a $1,000,000 policy limit, and a CGL policy issued by Fireman's Fund with a $1,000,000 policy limit. General and Fireman's Fund, as insurer of the excess over the auto policy, agreed to provide coverage.  Fireman's Fund, however, denied coverage under the CGL policy. 

   Plaintiffs partially settled, with General paying its $1,000,000 primary limit and Fireman's Fund paying its $1,000,000 excess limit.  Plaintiffs were given an assignment of Sinco's rights against the Fireman's Fund CGL policy.  The settlement also provided for an arbitration on the merits of plaintiffs' claims.  At arbitration, plaintiff's' award was in excess of $27,000,000.  A finding was made that Bibinz was, at the time of the accident, acting within the course and scope of his employment under the "required vehicle" exception to the "going and coming" rule and that Sinco had been negligent in hiring and retaining Bibinz.  The arbitration award was confirmed and judgment was entered.

   Plaintiffs then sued Fireman's Fund for breach of the covenant of good faith and fair dealing and for breach of the insurance contract.  Plaintiffs alleged that Bibinz was not an insured because at the time of the accident, he was not performing duties related to the conduct of Sinco's business.  The trial court granted Fireman's Fund's motion to dismiss.

   Under the CGL policy, employees of Sinco were included as insureds, "but only for acts within the scope of their employment by you while performing duties related to the conduct of your business . . . ."  Excluded from coverage was bodily injury arising out of the ownership, maintenance, use or entrustment to others of an auto. 

   On appeal, the plaintiffs argued that "while Bibinz was considered, for purposes of tort liability, to be in the course and scope of his employment by virtue of the required vehicle exception to the going and coming rule, he was, for purposes of insurance coverage, on his way but had not yet gotten there, to perform duties related to conduct of Sinco's business."  Therefore, Bibinz was not an "insured" and the automobile exclusion in Fireman's Fund's policy did not apply.

   The court rejected this argument.  The allegations of the underlying complaint established that Bibinz was acting within the scope of his employment while performing duties related to the conduct of the business.  Therefore, he was an insured.

   Further, Fireman's Fund had no duty to defend.  There were no disputed facts.  Coverage, or lack thereof, depended on the interpretation of the policy - a legal question.  Plaintiffs argued that Fireman's Fund had a duty to defend because in the underlying action, there was a potential that the "going and coming" rule would apply.  When, however, the plaintiffs filed their complaint, they alleged that Bibinz was the agent of Sinco and acting within the course and scope of his authority.  Based on this allegation, Fireman's Fund had no duty to defend under the CGL policy.

Exclusion for Roofing Excludes Liability for Claim Arising out of Re-Roofing

   An exclusion for claims arising from roofing barred coverage when the underlying plaintiff was injured after falling from a scaffold.  See Penn-America Ins. Co. v. Lavigne, 2010 U.S. App. LEXIS 17675 (1st Cir. Aug. 24, 2010).

   Michael Daigle was hired to put a new roof on an apartment building and to seal some windows.  Daigle removed the existing roof and re-roofed the structure.  While the job was in progress, the underlying plaintiff stopped at the apartment to look for Daigle.  He climbed up the scaffolding that accessed the roof.  When a portion of the scaffold snapped, the plaintiff fell to the ground, breaking his neck. 

   Daigle held a CGL policy with Penn-America.  An endorsement excluded "any and all claims arising from roofing."  Based on this endorsement, Penn-America denied coverage.  Penn-America filed an action for declaratory relief against Daigle and the plaintiff.  The district court granted summary judgment to the insurer.

   On appeal, the plaintiff argued despite the exclusion, his injuries did not arise from roofing. The First Circuit rejected the plaintiff's argument that the term "roofing" did not encompass the task of "re-roofing."  The risks an insurer sought to avoid by excluding coverage for roofing, such as the risk of bodily injury caused by the equipment involved and the height of the work, and the risk of property damage if the roof was not properly installed, were indistinguishable from those associated with re-roofing. 

   Second, the court rejected the plaintiff's argument there was a genuine issue of fact about whether the accident arose from roofing because the project involved both roof and non-roof related repairs and because the accident was based on faulty scaffolding instead of the roof.  The phrase "arising out of" meant the accident here was excluded.  There was no dispute that the plaintiff's injuries originated from, grew out of, flowed from or had a connection with, roofing. 

Fifth Circuit Considers Business Interruption Coverage After Hurricane Katrina

   The insured had a commercial property policy with Lexington.  Coverage included $25 million in losses for business interruption.  See Consolidated Co. Inc. v. Lexington Ins. Co., 2010 U.S. App. LEXIS 17146 (5th Cir. Aug. 17, 2010).  

   Hurricane Katrina damaged the insured's property and equipment.  The insured was able, however, to resume partial operations ten days after the storm.  In the 15 months prior to full restoration, the insured made a small profit of about $300,000. 

   Lexington initially advanced $3 million under the policy.  After adjusting the claim, Lexington determined the total loss was $3,247,070.  Believing the payment was insufficient, the insured refused to cash a supplemental check for $247,070.  By the time of trial, the insured claimed $19 million in business interruption losses under the policy, consisting of $7 million for lost profits and $12.3 million for "charges and expenses." 

   "Charges and expenses" under the policy were expenses that would have been incurred without the loss, but which continued during the business interruption.  The "actual loss" under the policy consisted of the net profit or loss which the business interruption prevented from being earned, and of all charges and expenses.  The policy allowed the insured to resume operations if it would reduce the loss.  Profits recoverable under the policy were those that would have been earned during the period but for being shut down by the hurricane.  The usual expenses that the insured still incurred, even though not operating, were also recoverable.

   At trial, the parties disagreed on whether the charges and expenses of $12.3 million should be paid in full or reduced to the extent they were offset by the income during the 15 months prior to restoring complete operations.  The jury awarded the insured $19.5 million for business-interruption loss, which included the insured's claim for charges and expenses.  The district court reduced by $3 million to account for the alleged failure of the jury to deduct the advance Lexington paid.  

   On appeal, Lexington argued the district court erred by not instructing the jury to reduce the insured's "charges and expenses" by revenues the insured earned during its 15 months of partially resumed operations.  The Fifth Circuit agreed and reversed this portion of the jury verdict.  When a partial resumption in operations reduced the actual loss, so substantially as to create some profit, all charges and expenses were, by definition, covered by income.  The charges and expenses for which the policy would pay had there been no resumption of operations was shown to be $12.3 million.  These expenses had to be part of the $205 million in expenses that were incurred during resumed operations.  All expenses were recouped from the income of the business and were not a "loss" to the compensated under the policy.  Just as the insured would have paid the charges and expenses out of its revenue if Katrina had never struck, the policy provided for the insured to pay them to the extent it could do so out of the revenue from partially resumed operations.  Therefore, the award of $12.3 million in charges and expenses was vacated.

   Thanks to my Damon Key colleague, Rebecca Copeland, for sending me this case.

Reimbursement of Defense Costs Proper Under Colorado Law

   When the insured was sued for allegedly engaging in Medicare and Medicaid fraud, a defense was sought from the insurer.  See Valley Forge Ins. Co. v. Zurich Am. Ins., 2010 U.S. App. LEXIS 17098 (10th Cir. Aug. 16, 2010).  Once it was determined there was no duty to defend, was the insurer entitled to reimbursement of defense costs?

   The insured operated a long-term care facility.  An audit revealed substandard care to Medicare and Medicaid patients and that the insured had submitted false and fraudulent claims for the care provided.  When the federal government brought suit, the insured sought a defense from its insurer.  The insurer agreed to defend, but subject to a reservation of rights including the right to seek reimbursement for all expenses incurred in defending the insured should it later be determined there was no duty to defend.  The insured accepted the defense without objecting to the reservation of rights.

   The insurer eventually brought suit seeking a declaration it had no duty to defend the insured against the government claims.  The insurer also sought reimbursement of the defense costs already expended.   The district court determined there was no duty to defend and that the insurer was entitled to recoup all costs expended in defending the insured.

   The Tenth Circuit affirmed.  Two Colorado Supreme Court cases were persuasive and controlling.  These cases recognized the insurer's entitlement to reimbursement of defense costs if it was determined there is no duty to defend.  These cases allowed the insurer to reserve a right to reimbursement even though the policy itself did not provide for reimbursement.  This result protected the insureds because the insurers had to defend even though it may eventually determined there was no duty to defend.  On the other hand, the insurer could obtain reimbursement when coverage was found not to exist so long as they reserved the right to do so.   

Burden of Proving Damage Caused by Both Covered and Non-Covered Risks Addressed

   When both a covered risk and a non-covered risk cause some of the property damage, which party bears the burden of identifying the discrete items of property that were damaged and proving what portion of the damage was caused by a non-covered or excluded risk?  See Bayle v. Allstate Ins. Co., 2010 U.S. App. LEXIS 16635 (5th Cir. Aug. 11, 2010).

  The insureds' home was damaged by Hurricane Katrina.  After the insureds evacuated, eight to ten feet of water (mixed with escaped oil from a nearby storage tank) flooded their one-story house.  Little of the damage appeared to have been caused by wind.  An adjuster observed severe damage to the interior and contents of the house, all of which were attributed to flood.  Further, few window panes were broken.   Policy limits of $105,000 were paid under the flood policy.  But only $17,560.73 was paid for wind damage under the homeowners policy.

   The insureds sued and Allstate moved for summary judgment.  The district court granted Allstate's motion because the insureds failed to point to any wind damaged items for which Allstate had not already compensated them.

   On appeal, the Fifth Circuit noted that Allstate did not contest that a covered peril (wind) caused some damage to some of the insureds' property.  The question was which particular items of property were damaged by wind.  The insureds never identified which particular damaged items had gone uncompensated or under-compensated under their policy's coverage for structural damage.  They simply presented the court with a line-item cost estimate to repair all the damage to their property, without attempting to explain which portion of those costs were attributable to wind-caused damage. 

   When Allstate presented evidence sufficient to establish a prima facie case that flood, not wind, caused any uncompensated or under-compensated damage complained of by the insureds, the burden of production shifted to the insureds to offer rebuttal evidence sufficient to create a genuine issue of material fact as to which, if any, uncompensated items of damage were caused by wind.  Summary judgment was proper because the insureds failed to bear their burden of production after Allstate produced evidence identifying those items of damage that were excluded from wind coverage because they were caused by flood.

Mold Damage to Personal Property Covered

   Although the insurer contended the Texas Supreme Court had previously decided that mold was never covered under a homeowner's policy, the Court found coverage for mold damage to personal property in State Farm Lloyds v. Page, 2010 Tex. LEXIS 415 (Tex. June 22, 2010).

   The insured discovered mold and water damage to her home and to some of her personal property.  She filed a claim with State Farm pursuant to her homeowner's policy.  Leaks were found in the plumbing system and sanitary sewer lines.  Although State Farm covered the costs of some repair and remediation, a dispute arose over amounts needed to fully repair the home and its contents.  The insured eventually sued.

   The policy covered the dwelling from all risks of physical loss described in the policy unless excluded.  Similarly, physical loss to personal property was covered if caused by a listed peril and not excluded.  Accidental discharge or leaking of water from a plumbing system was a listed peril for both the dwelling and personal property sections of the policy.  But loss caused by mold was excluded from coverage of the dwelling.  On the other hand, the mold exclusion did not apply to the personal property section of the policy.

   State Farm argued that Fiess v. State Farm Lloyds, 202 S.W. 3d 744 (Tex. 2006) was controlling, and the trial court agreed.  In Fiess, Tropical Storm Allison caused flood damage to the home.  The flooding caused some mold contamination, but most of the mold was caused by leaks from the roof, plumbing and air conditioning.  The Texas Supreme Court determined the ensuing loss provision reinstated coverage only as to losses caused by an intervening cause (like water damage) that in turn followed from an exclusion.  Therefore, the ensuing loss provision did not reinstate coverage for otherwise excluded mold damage.  But the court also noted that the insureds in Fiess did not appeal whether personal property was covered for mold damage resulting from plumbing leaks.  

   Here, as in Fiess, the policy clearly clearly excluded mold coverage for the dwelling.  The mold exclusion, however, was expressly removed and not applicable to the personal property section of the policy that covered plumbing leaks.  Therefore, the insured's claims for mold damage to her personal property resulting from plumbing leaks was covered under the homeowner's policy.

New Damon Key Blog on Appellate Practice

   Be sure to check out my Damon Key colleague's, Rebecca Copeland, new blog on appellate practice here [http://recordonappeal.typepad.com].  Rebecca will highlight current cases, events and topics in the area of appellate law.  Rebecca launches her new blog today.

Documented Prior Knowledge of Defect Eliminates Coverage

   Sorting out whether the contractor had coverage for alleged construction defects under the subcontractor's policies was the issue in Travelers Cas. and Sur. Co. v. Dormitory Auth., State of New York, 2010 U.S. Dist. LEXIS 79024 (S.D. N.Y. July 30, 2010).

   Trataros Construction, Inc. was the general contractor on the project.  Trataros contracted with Crocetti to install an epoxy terrazzo flooring throughout various public spaces within the building.  Due to design or construction errors, some portions of the concrete subfloor were insufficiently level to allow for the installation of the epoxy terrazzo flooring directly on the concrete subfloor.  A change order granted the additional cost of installing a self-leveling floor fill (the "underlayment") on top of the concrete subfloors.  Bartec Industries, Inc. was the subcontractor for furnishing and installing the underlayment.  Bartec was required to add Trataros as an additional insured under Bartec's CGL policies.

   Bartec installed the underlayment.  Thereafter, problems with the completed flooring system began to manifest.  Hollow spots were detected in the underlayment, and the epoxy terrazzo did not properly bind to the underlayment.  The epoxy terrazzo flooring and underlayment had to be removed and replaced. 

   Trataros was sued by the owner for construction defects, including the defective installation of the flooring system.  The owner sought damages of $20 million on the construction defect claim and a further $8 million on the delay, disruption, and impact claims.  Trataros sought coverage under Bartec's policies.  The Insurers denied coverage and eventually moved for summary judgment on various grounds.  The district court granted summary judgment to the Insurers.  

   One Insurer was granted summary judgment because of a failure to provide adequate notice of an additional insured.  An endorsement to the policy permitted inclusion of a general contractor as an additional insured where a certificate of insurance showing that organization as an additional insured had been issued and received by the Insurer.  It was undisputed that no certificate of insurance was ever issued to Trataros.  Because this condition precedent was not satisfied, Trataros was not an insured within the meaning of the policy.

   Even if Trataros was an additional insured, coverage was only provided for the additional insured's vicarious liability for acts or omissions of the named insured.  Here, Bartec ceased its work installing the underlayment on Trataros' behalf before the policy took effect.  While Trataros argued that the "continuous trigger" doctrine mandated coverage, this doctrine applied to the unrelated question of determining when "property damage" occurs, not whether the construction operations by the named insured were "ongoing." 

   A second Insurer prevailed on summary judgment because its policy included an exclusion for coverage of known-injury-or-damage.  If an insured party became aware that property damage had occurred or had begun to occur prior to the policy period, then the insured could not seek coverage for that property damage, even if such damage continued during the policy period.  Here, it was undisputed that Trataros was put on formal notice of the flooring problem when it was advised prior to commencement of the policy that portions of the terrazzo flooring installation had separated and areas of delamination of layers existed. 

   Finally, considering another Insurer's policy, the court agreed that, when read jointly, the three business risk exclusions - Exclusion j (5), Exclusion j (6), and Exclusion m - were fatal to Trataros' claim.  Therefore, no coverage was available for the alleged flooring failure under the policy.

Anti-Concurrent Causation Clause Does Not Bar Excess Coverage

   The Fifth Circuit considered whether the district court properly determined that an excess policy covered flood, but that coverage was limited under the policy's anti-concurrent causation clause (post on district court's prior decision here).  The appellate court reversed in part and remanded.  Stewart Enter., Inc. v. RSUI Indem. Co., Inc., 2010 U.S. App. LEXIS 16555(5th Cir. Aug. 4, 2010).

   The insured's properties suffered heavy damage from wind and flood created by Hurricane Katrina.  The insured had three layers of insurance.  Lexington issued the primary lawyer, providing all risk coverage for up to $10 million, including $10 million in flood coverage.  Lloyd's had the first excess layer, $15 million of all risk coverage,  including $15 million in flood coverage, excess to the first $10 million provided by Lexington.  Finally, RSUI issued the second excess layer, providing a coverage limit of $225 million, excess to the $25 million provided by the first two layers.  Both Lloyd's and RSUI's policies were  "following form," adopting the terms and conditions of the Lexington primary policy.

   After Katrina, both Lexington and Lloyd's paid the full amounts of their policies.  RSUI resisted, however. RSUI contended it was not obligated to cover flood damage.  Even if flood damage was covered, it was limited by the anti-concurrent causation clause to damage caused exclusively by flood and not in conjunction with wind.  The insured argued the RSUI policy adopted the limits set forth in the Lexington and Lloyd's policies, and covered any of the $25 million in flood coverage unpaid by these policies.  Further, the anti-concurrent causation clause only operated above that $25 million limit.

   The district court found that the RSUI policy covered up to $25 million in flood damage, but that the anti-concurrent causation clause barred any recovery for damage jointly caused by wind and flood.  Damage caused by wind or flood exclusively, however, would be covered.

   Devoting extensive effort to untangle various provisions in the three policies, the Fifth Circuit first determined that RSUI's following form policy provided flood coverage.  The court then turned to whether the anti-concurrent causation clause under Lexington's policy barred recovery for damage caused concurrently by wind and flood within the $25 million limit.

   The relevant provision in Lexington's policy read:

This policy does not insure against loss or damage caused directly or indirectly by any of the following excluded perils.  Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss:  

. . .

P. loss or damage cause by or resulting from:

. . .

(2) Flood, unless specified in Section 3, Sublimits of Liability, Paragraph J., and then only for such specified amount

(3) any and all loss from any other cause when occurring concurrently or sequentially with . . . Flood . . . .

Section 3, Paragraph J set forth a $10,000,000 sublimit of liability to cover Flood.  Therefore, the Lexington policy excluded flood, but in the same sentence created an exception to the exclusion by providing flood coverage up to $10,000,000.

   The Fifth Circuit found there was coverage for damage caused by wind and flood regardless of the two anti-concurrent causation clauses.  RSUI's interpretation would force the insured to demonstrate that damage was caused exclusively by one of two included perils.  This reading could only assume a full exclusion of flood damage, ignoring that the Lexington policy, which the RSUI policy followed, did cover flood.  Accordingly, the anti-concurrent causation clause applied only to damage in excess of the $25 million aggregate limit.

   Thanks to new Damon Key colleague, Rebecca Copeland, for flagging this case.

Health Insurer Cannot Force Arbitration of Insured's Tort Claims

   When sued by its insured, the health insurer sought to compel arbitration as part of the procedures under its policy for contesting a denial of coverage.  In an opinion authored by newly seated Judge Ginoza, the Hawaii Intermediate Court of Appeals affirmed denial of the motion to compel because the insured's lawsuit was based on tort, not coverage issues.  See Yogi v. Hawaii Medical Service Assoc., No. 29145 (Haw. Ct. App. Aug. 27, 2010).

   The insured sustained work injuries in 1997, requiring multiple surgeries between 1998 and 2003.  The insured's doctor submitted a preauthorization request to HMSA for an intrathecal infusion pump to relieve  the insured's pain.  HMSA denied coverage, determining that the intrathecal infusion pump was not medically necessary.  The insured appealed HMSA's denial under an internal appeal process set out in the policy.  HMSA again denied coverage.  Finally, an external review was sought before the Hawaii Insurance Commissioner, as provided by the policy.  The Insurance Commissioner reversed HMSA's denial of coverage.

   In 2008, the insured filed suit, alleging that HMSA acted unreasonably in denying the preauthorization request for the pump.  The insured asserted claims for breach of contract, bad faith, and emotional distress, and sought damages.  HMSA moved to compel arbitration.  The trial court denied the motion, noting that no provision in the policy required arbitration for disputes involving bad faith or related claims.

   The ICA affirmed.  The policy did not establish an intent by the parties to have tort claims subjected to the arbitration provision.  Arbitration or an independent review by the Insurance Commissioner were the policy's procedures for challenging or disputing HMSA coverage decisions.  At a minimum, the policy created an ambiguity regarding the intent and meaning of the arbitration provision.