Insurance Law Hawaii

Hawaii Auto Policy Entitles Insured To Uncapped Wage Loss Benefits

   The insured was injured in an auto accident on the Big Island on March 26, 1998.  See First Ins. Co. of Hawaii, Ltd. v. Dayoan, Sr., 2010 Haw. App. LEXIS 697 (Haw. Ct. App. Nov. 18, 2010).  He was covered by a Personal Auto Policy issued in February 1998 by First Insurance.  The policy provided coverage for wage loss to any insured who suffered "bodily injury" which prevented the insured from engaging in his employment. 

   The accident left the insured disabled and unable to engage in his usual occupation as a kitchen helper/dishwasher.  He was sixty years old at the time of the accident.  First extended coverage and in a letter dated April 3, 1998, explained that that the policy included optional wage loss benefits that would terminate upon the insured's death. First commenced to pay $1500 in month wage loss benefits pursuant to the policy.

   After paying wage loss benefits for almost seven years, First filed for declaratory relief on April 21, 2005, seeking a judgment that it was no longer obligated to extend wage loss benefits to the insured, now sixty-eight years old.  The complaint was based on amendments to the Hawaii Insurance Code in 1997 and 1998.

    The purpose of the 1997 Amendments was to reduce motor vehicle insurance premiums and to preserve adequate protection of drivers' rights.  Costly mandatory coverage for wage loss was converted to optional coverage.  The 1997 Amendments became effective on January 1,1998, after the insured's accident.  In 1998, further amendments were made by reducing the wage loss benefit option and permitting wage loss caps per accident.  The 1998 Amendments continued to permit insurers to offer higher wage loss coverage limits for a higher premium. 

     First moved for summary judgment, arguing the 1998 Amendments capped the amount of wage loss benefits to which insureds were entitled.  First argued that although the amendments were enacted subsequent to the accident, they clarified the legislature's intent in adopting the 1997 Amendments, and thereby capped the insured's lifetime recovery for wage loss at $9,000.  Otherwise, First argued, the statute was illogical because an insurer would have to continue paying benefits to an insured who was no longer able to work and would not have suffered any wage loss.

    The Circuit Court denied First's motion for summary judgment and granted summary judgment to the insured.  Further, attorney fees were awarded to the insured at the rate of $250 an hour.  First appealed the ruling on summary judgment and the fee award.

    The Intermediate Court of Appeals affirmed.  Under both the 1997 Amendments and the policy, the insured was entitled to $1,500 per month in wage loss benefits.  The fact that the legislature amended the statute in 1998 to allow wage loss benefit caps was not sufficient to establish that it meant to require the caps in 1997. 

   Further, the attorney fees award was appropriate.  The statute allowed the insured to recover reasonable fees when the insured contested its liability under a policy and was ordered to pay benefits.  Haw. Rev. Stat. 431:10-242.  First sought declaratory relief establishing it was no longer responsible for paying the wage loss benefits.  The Circuit Court denied relief and ordered that First had an obligation "to pay wage loss benefits."  First further argued a rate of $250 an hour was unreasonable because the Insurance Commissioner had approved the rate of $125 per hour in an unrelated administrative proceeding.  The Commissioner's decision did not preclude the Circuit Court from determining that $250 per hour was a more appropriate rate under different circumstances.  Further, the insured provided evidence that $250 per hour was well within the prevailing rate for experienced attorneys in Hawaii.

Policy Language Restricts Ongoing Damage to One Occurrence

   Are construction defects that allegedly result in water intrusion and property damage over several policy periods the result of one occurrence or multiple occurrences?  This was the issue under consideration in Bayley Constr. v. Am Guar. and Liab. Ins. Co., 2010 U.S. Dist. LEXIS 110767 (W.D. Wash. Oct. 15, 2010).

   Bayley Construction was the general contractor for construction of a shopping center.  When sued for construction defects, it settled with the help of some of its insurers.  Travelers contributed $1 million, Wausau contributed $1 million, and American Guarantee contributed $4 million.  After the settlement, American Guarantee pursued its cross claims against National Union and Travelers.  National Union and Travelers moved for summary judgment.

   National Union's policies first became effective on December 31, 2004.  The policies defined "occurrence" as "an accident, including continuous or repeated exposure to conditions.  All such exposure to substantially the same general conditions shall be considered as arising out of one Occurrence."   An endorsement addressed continuing damage as follows:

   In the event of continuing or progressive Bodily Injury or Property Damage over any length of time, such Bodily Injury or Property Damage shall be deemed to be one Occurrence and shall be deemed to occur only when such Bodily Injury or Property Damage first commenced.

   National Union argued that because it was undisputed that the water damage commenced during the 2000-01 period - before National Union's policies were in effect - all subsequent damage had to be attributed to the date of the original occurrence.  Accordingly, the damage occurred outside National Union's policy period.  American Guarantee responded that its expert identified certain property damage that did not occur until 2006, 2007 or 2008, which fell within National Union's policy periods. 

   The court noted that merely because the damage was ongoing and continued into the National Union policy period did not change the fact that it started before the National Union policy period.  Because National Union's policies specifically stated that ongoing property damage was considered to be one occurrence on the date of its first inception, and the first inception of the water intrusion was before 2004, the "occurrence" of property damage took place before the earliest National Union policy period.

   Travelers motion was based on "anti-stacking" language in its policies.  Travelers paid the $1 million policy limits on Bayley's 2000-01 policy, but did not pay any additional amounts despite issuing subsequent policies covering additional policy periods.  The anti-stacking language stated,

   We'll pay amounts . . . legally required to pay as damages for covered bodily injury or property damage that happens while this agreement is in effect. . . and is not property damage covered by another insurance policy issued to you by us. . . . 

Travelers argued the property damage at the shopping center first manifested during the 2000-01 policy period and Travelers paid on that policy.  Therefore, the property damage "happened" during the 2000-01 policy period and the "anti-stacking" language precluded aadditional coverage under its subsequent policies.

   The court agreed.  Even American Guarantee's witnesses conceded the property damage constituted one occurrence of continuing damage and Travelers paid the policy limit on the 2000-01 policy.   Under the policies' anti-stacking provision, no subsequent policies covered the loss at the shopping center.

Hawaii Federal Court Construes Competing "Other Insurance" Provisions

    If the insured's two carriers both have "other insurance" provisions, which policy is primary and which is excess.  The federal district court sorted through this issue in Nautilus Ins. Co. v. Lexington Ins. Co., 2010 U.S. Dist. LEXIS 120883 (D. Haw. Nov. 15, 2010).

    In July 2007, Kila Kila Builders, a subcontractor, and VP&PK, the developer, were sued by homeowners for property damage as well as personal injuries arising from a construction project.  A jury ultimately found VP&PK liable to eight owners for $232,700 in damages, while finding no liability against Kila Kila.

    Kila Kila was insured by Nautilus.  VP&PK was an additional insured under the Nautilus policy and the named insured under a policy issued by Lexington. VP&PK tendered its defense to Nautilus.  Nautilus agreed to defend under a reservation of rights.  Nautilus subsequently notified Lexington of the claims asserted against VP&PK.  Both policies identical contained "other insurance" provisions:

    This insurance is excess over:

        (2) Any other primary insurance available to you . . . for which you have been added as an additional insured . . .

        When this insurance is excess, we will have not duty . . . to defend the insured against any "suit" if another insurer has a duty to defend . . . .

    Lexington contended it was the excess policy and refused to contribute to the defense.  Nautilus sued Lexington for declaratory judgment, equitable contribution and reimbursement.  Both parties filed motions for summary judgment.  The court decided Lexington was entitled to summary judgment on all counts.

    The court first rejected Nautilus's argument that Dairy Road Partners v. Island Ins., 92 Haw. 398, 992 P.2d 93 (Haw. 2000), restricted Lexington from considering extrinsic evidence, including the Nautilus and Lexington policies, to determine whether it had a duty to defend.  Hawaii law would permit Lexington to examine both policies in determining whether it was excess or whether it had a duty to defend.

   Noting a dearth of Hawaii cases, the court looked to California law for guidance on determining the impact of the two "other insurance" provisions in the policies.  Although the provisions in the two policies were nearly identical, they did not conflict.  Kila Kila was the named insured in the Nautilus policy and VP&PK was an additional insured.  VP&PK was the named insured in the Lexington policy.  Because VP&PK was an additional insured in the Nautilus policy, the "other insurance" provision of the Lexington policy applied.  Kila Kila was not an additional insured under any policy, meaning the "other insurance" provision of the Nautilus policy did not apply.  Accordingly, Nautilus was not entitled to equitable contribution from Lexington for the cost of defending VP&PK. 

Payment to Settle Class Action is Insurable Loss to Insured Corporation

   After settling a shareholder class action, Genzyme Corporation was denied coverage for its payment under its corporate and director and officer liability policy with Federal Insurance Company.  Genzyme Corp. v. Federal Ins. Co., 2010 U.S. App. LEXIS 21079 (1st Cir. Oct. 13, 2010).  The district court held Genzyme's loss was not insurable as a matter of Massachusetts public policy.  The coverage dispute was appealed to the First Circuit.

   Genzyme facilitated a share exchange, including cancellation of some shares, which was unpopular with many shareholders.  A class action suit was filed against Genzyme, its board of directors and its officers.  The complaint alleged that Genzyme and its officers and directors violated the securities laws by causing Genzyme to engage in insider trading and by failing to disclose material information to the public.  They also alleged that the directors and officers breached their fiduciary duties of loyalty, candor, good faith and due care to the shareholders.  Further, the class action plaintiffs alleged that Genzyme engaged in unfair and deceptive trade practices under state law.

   Genzyme eventually settled all of the class members' claims by making a one-time payment of $64 million.  It then sought to recover from Federal.  Federal's policy covered losses for which Genzyme granted indemnification to its directors and officers.  It also covered losses suffered by Genzyme on account of securities claims.  Federal denied coverage, stating that the settlement payment was not an insurable loss under the policy.  Genzyme then sued, alleging that Federal breached the policy by denying coverage.

   Federal's motion to dismiss Genzyme's complaint was granted when the district court agreed that the settlement payment was not an insurable loss.  The district court concluded that a payment to resolve a claim that benefited one group of shareholders at the expense of another group of shareholders was not legally insurable as against public policy.

   The First Circuit reversed.  There was no support in Massachusetts statutory or case law for the public policy rationale.  Therefore, the district court's ruling was reversed.

Ninth Circuit Determines Insurer Has Duty to Defend Trademark Infringement Claim

    The Ninth Circuit ruled that the insurer providing a defense in a trademark infringement case was entitled to equitable contribution from another insurer that improperly refused to defend.  See  Hudson Ins. v. Colony Ins., No. 09-55275 (9th Cir. Nov. 5, 2010)[here].

   In the underlying suit, NFL Properties LLC accused All Authentic Corporation of making and selling counterfeit NFL jerseys.  Further, All Authentic offered a counterfeit "Steel Curtain Custom Limited Edition Steelers Jersey" on its website.  The complaint alleged that All Authentic had no authorization by NFL Properties to use any NFL Marks in connection with its jerseys.

  All Authentic tendered to its two insurers, Colony and Hudson.  Colony denied coverage, while Hudson defended under a reservation of rights. 

   The Colony policy covered "personal and advertising injury", defined as "injury . . . arising out of [the offense of infringement] . . . in your 'advertisement.'"  The policy excluded "personal and advertising injury arising out of the infringement of copyright, patent, trademark . . ."  However, this exclusion did not apply to infringement in advertisement of "copyright, trade dress or slogan." 

   Hudson's defense costs in the underlying case were in excess of $900,000.  The underlying case eventually settled.  Hudson then sued Colony for equitable contribution for 50% of its defense costs.  Hudson argued Colony should have defended because based on the allegations in the underlying complaint, All Authentic faced potentially covered liability for slogan infringement in All Authentic's advertisements.  The district court granted Hudson's motion for partial summary judgment, concluding that by alleging that the insured infringed the phrase "Steel Curtain," the underlying complaint set forth a claim for slogan infringement that was potentially covered.

   The Ninth Circuit affirmed, rejecting each of Colony's arguments.  Colony first argued there was no claim of "slogan infringement" made in the complaint, and neither an insured nor a court could speculate about unpled claims to manufacture a potential for coverage.  But the complaint alleged that All Authentic sold a "Steel Curtain Limited Edition Steelers Jersey" on its website, which read "Steel Curtain" across the back and had the number of four Pittsburgh Steelers players.  This potentially stated a claim for slogan infringement.  It did not matter that the complaint never referred to "steel curtain" as a slogan and never listed slogan infringement as a cause of action.

   Next, Colony argued the court should not find potential liability for slogan infringement because NFL Properties must have consciously chosen not to advance such a claim.  The technical label on a cause of action, however, did not dictate the duty to defend whether the claimed cause of action was omitted out of negligence or for strategic adversarial reasons. It only mattered whether the facts alleged or otherwise known by the insurer suggested potential liability. 

   Finally, Colony argued that even if the underlying complaint stated a potential slogan infringement claim, the NFL disclaimed any rights to that slogan in its complaint and thus could not have pursued a claim for slogan infringement.  The Ninth Circuit noted, however, that NFL Properties did not expressly disclaim a slogan infringement claim.  Instead, the complaint stated that the Pittsburgh Steelers had strong common law rights in the mark "Steel Curtain." 

   Therefore, a duty to defend a potential slogan infringement claim existed.  Colony had a duty to defend All Authentic and Hudson was entitled to equitable contribution.

    Thanks to fellow Damon Key blogger Mark Murakami (http://www.hawaiioceanlaw.com/) for the heads up on this case.

We Make Top 50 Health Insurance Blogs

   Thanks to the Health Express, a blog addressing health and medical information, for informing us we are among the Top 50 Health Insurance Blogs [post here].  The Health Express post states, "Hawaiian clients benefit from the expertise and diverse backgrounds of this Damon Key Leong Kupchak Hastert blog."

    Thanks for the notice and the compliment. 

Is Damage Caused by Water Escaping from Drainage System Excluded as "Surface Water" or Flood?

  Whether damage caused by rainwater escaping from a drainage system was excluded as "surface water" or flood was the issue before the court in M  and M Corp v. Auto-Owners Ins. Co., 2010 S.C. LEXIS 326 (S.C. Oct. 11, 2010).

   The insured owned a hotel located along a street that was being improved by the installation of a new underground storm water drainage system.  Heavy rains hit before construction was completed, causing significant water damage to the insured's hotel due to the rainwater exiting the drainage system.  As water left the drainage system, it pooled in the hotel parking lot, reaching sufficient depth to enter the hotel and cause damage.

   The insurer denied coverage based on surface water and flood exclusions.  Consequently, the insured filed suit in federal court.  The district court certified the following questions to the South Carolina Supreme Court:

   1.  Under an all-risk policy, does "surface water" encompass rainwater collected and channeled in a storm water collection system?

   2.  If the answer to Question 1 is no, can such non-surface water reacquire its classification as surface water upon exit from the storm water collection system and, if so, under what circumstances?

   3.  Under an all-risk policy, does "flood water" encompass water discharged from a storm water collection system in concentrated form, pooled, and that thereafter enters a building?

    The South Carolina Supreme Court answered all certified questions in the negative.  Addressing whether the collected water was "surface water," the court noted that while the water was surface water before it was collected in the storm water system, it then was concentrated and cast onto the insured's property.  Once surface water was deliberately contained, concentrated, and cast onto an adjoining landowner's property, it was no longer naturally flowing, diffuse water.

   Second, the water did not become surface water again under the policy once it was discharged from the pipe. 

   Finally, the water was not "flood water."  Flood water meant the waters had to breach their containment, either as a result of a natural phenomenon or a failure in a man-made system such as a levee or a dam.  The water here did not breach containment, but instead was deliberately channeled and cast upon the insured's land. 

  

Article Explores Use of Social Networking in Worker's Compensation Litigation

   An upcoming article in the Pace Law Review will address the use of social networking in insurance and worker's compensation litigation.  The abstract and draft article are here.  The article addresses the intersection of professional responsibility, discovery, privacy, and evidence with social networking in state workers’ compensation systems.

   Thanks to the authors, Gregory M. Duhl, Associate Professor of Law at William Mitchell College of Law in St. Paul, Minnesota, and Jaclyn Miller of Fitch, Johnson, Larsen, & Held P.A. for sending us the link to the abstract and draft article to post on our blog.

Allocation Issues Addressed

   A thoughtful opinion concerning the allocation of indemnity obligations between an insurance company and a policyholder was rendered in Peabody Essex Museum, Inc. v. United States Fire Ins. Co., 2010 U.S. Dist. LEXIS 106275 (D. Mass. Sept. 30, 2010).

   At some point over the last several decades, an oil tank on the insured Museum's property ruptured, and oil seeped over to the neighbor's property.  The oil was discovered in May 2003.  An investigation showed that the oil originated from the Museum's property.  The neighbor submitted a demand letter for $400,000.  

    U.S. Fire issued a policy to the Museum in effect from December 19, 1983 to December 19, 1985.  Although the policy was effective for another year, it had an absolute pollution exclusion precluding coverage, as did all subsequent policies.  U.S. Fire refused to defend the Museum.  The Museum settled with the neighbor for $300,000.  U.S. Fire refused to indemnify for the settlement.  The Museum then sued U.S. Fire for declaratory relief.

      A prior ruling in the case determined that U.S. Fire breached its duty to defend.  As a result, U.S. Fire now carried the burden of proof on the indemnity issue to show the oil damage was not covered.  In a June 2009 trial, a jury found U.S. Fire had not met its burden to show damage only occurred after December 19, 1985, or subsequent to its policy period.  Nor did U.S. Fire meet its burden to show the date on which the release of oil first caused property damage. 

    The current opinion addressed the impact of a recent case decided by the Massachusetts Supreme Judicial Court (SJC), Boston Gas v. Century Indemn. Co., 454 Mass. 337 (2009).  There, the SJC held that liability among  several insurers with triggered policies should be prorated where the insured incurs covered costs as a result of ongoing environmental contamination occurring over more than one year and the insurer provided coverage for less than the full period of years in which the contamination occurred. Further, the court held that a "time-on-the-risk" method for allocation of pro rated liability was applicable when available evidence did not allow a more accurate allocation of losses. 

   The court noted that Boston Gas presented the typical situation in which the insured must prove coverage. Here, the breach of the duty to defend shifted the burden of proof, which meant U.S. Fire had to prove noncoverage.  At trial, U.S. Fire was unable to meet its burden as to when the property damage began.  Therefore, the current dispute was whether U.S. Fire was responsible for paying the full indemnity pursuant to Boston Gas.

   Since U.S. Fire failed to meet its burden, the court construed the jury's findings to mean that the allocation period began on the first day of U.S. Fire's policy.   If the allocation period extended beyond U.S. Fire's coverage into periods when the Museum was uninsured, indemnity would be divided between the insured and uninsured periods in accordance with Boston Gas. 

    The appropriate end date was more difficult to determine, however.  The issue was not addressed in the jury trial and U.S. Fire never had an opportunity to present evidence on when the oil stopped causing damage. Therefore, a new trial was ordered to determine when the spilled oil stopped causing additional property damage which would mark the end of the allocation period.  The Museum could present evidence that the spilled oil stopped spreading at some point prior to 2003, and U.S. Fire could present evidence that it continued to spread after the discovery date.

   Finally, the court could not determine whether the "time-on-the-risk" method of allocation was applicable.  The ideal method of allocation was a "fact-based" allocation, in which loss was allocated based on the precise injury that took place during each policy or uninsured period.  Therefore, at the trial, the Museum could present evidence for a "fact-based" allocation.