Insurance Law Hawaii

Fifth Circuit Concurs with Hawaii Supreme Court In Upholding Anti-Assignment Provision

   In Del Monte Fresh Produce (Haw.), Inc. v. Fireman's Fund Ins. Co., 183 P.3d 734, 745 (Haw. 2007), the Hawaii Supreme Court held that recognizing the assignment of an insurance policy by operation of law to a party acquiring liabilities through contract was inconsistent with Hawaii law.  Citing Del Monte, the Fifth Circuit reached a similar conclusion while interpreting Texas law.  See Keller Found., Inc. v. Wausau Underwriters Ins. Co., 2010 U.S. App. LEXIS 23838 (5th Cir. Nov. 19, 2010). 

   In Keller, the new company entered into a purchase agreement to purchase certain assets and assume certain liabilities of the old company.  The purchase agreement transferred all of the assets of the old company to the new company, except for "excluded assets," which included "all . . . insurance policies."  The agreement further provided that the new company would "assume and agreed to perform, pay and discharge when due the assumed obligations."  Finally, the old company was solely responsible for all "retained obligations," which included specific lawsuits listed in the agreement.

   The old company held general liability policies with Wausau, which included an anti-assignment provision, stating, "Your rights and duties under this policy may not be transferred without our written consent  . . . ."  Consent to an assignment of the policies to the new company was never obtained from Wausau.

   After the sale, several lawsuits were filed in various states for defects and property damage allegedly arising from the old company's work prior the asset purchase and during the term of the Wausau policies.  Wausau refused to defend or indemnify the new company based on the anti-assignment provision.  When the new company sued, the court granted its summary judgment motion, determining that Wausau's coverage transferred from the old company to the new company as a chose in action with the general transfer of all assets in the purchase agreement or by operation of law.

   The Fifth Circuit reversed.  The non-assignment clause barred any assignment of coverage without Wausau's approval, rendering invalid any attempted transfer.  Although the majority of courts did not enforce non-assignment clauses for assignments made post-loss, Texas diverged from this majority.  Therefore, no transfer of the insurance coverage for the pre-acquisition losses were valid without the consent of Wausau.

   Nor could the coverage be caste as the transfer of a "chose in action."  Prior cases from the Fifth Circuit rejected the argument that the non-assignment clause had no effect on the assignment of "proceeds" of insurance rather than a claim or demand. 

   Finally, the court rejected the argument that the policy transferred by operation of law with the new company acquiring the assets of the old company.  The Ninth Circuit held that insurance coverage for pre-acquisition losses transferred by operation of law when liabilities in question were transferred by operation of law, thereby disregarding the policy's non-assignment clause.  See N. Ins. Co. of New York v. Allied Mut. Ins. Co., 955 F.2d 1353 (9th Cir. 1992).  But the California Supreme Court refused to extend the N. Ins. rule to instances where the successor corporation assumed liability by contract, as opposed to by operation of law.  See Henkel Corp. v. Hartford Accident & Indem. Co., 62 P.3d 69 (Cal. 2003).   Hawaii, in the Del Monte decision, and other jurisdictions had also rejected the N. Ins. rule where the acquiring company assumed liability through contract.  Therefore, the Fifth Circuit predicted that Texas courts would also reject the N. Ins. rule where the liabilities in question were assumed through a contract that also specifically excluded the transfer of the insurance policy covering those liabilities.

Excess Policy Incorporates Anti-Concurrent Causation Clause, Eliminating Coverage

   The Fifth Circuit considered whether the second-layer excess policy incorporated the anti-concurrent causation clause and water exclusion from the primary policy.  See ARM Properties Management Group v. RSUI Indemn. Co., 2010 U.S. App. LEXIS 23174 (5th Cir. Nov. 5, 2010).

   ARM purchased property insurance for hundreds of apartment complexes.  By grouping separate properties together under a single policy, ARM was able to obtain better insurance rates for property owners.  When Hurricane Katrina struck in August 2005, nine of ARM's covered properties sustained damage.  Each of the properties had three layers of coverage.  The primary policy had a $20 million coverage limit.  A first-layer excess had a $10 million limit for damage amounts exceeding the primary policy limits.  Finally, RSUI issued a second-layer excess policy with a $470 million coverage limit for damage amounts exceeding the combined primary and first-layer excess coverage limit of $30 million.

   The primary policy and first-layer excess paid the combind  liability limit of $30 million.  ARM sought $5.5 million in combined wind and water damage from RSUI's policy.  RSUI responded that no payment was due because the wind-water damage was excluded under the primary policy's anti-concurrent causation clause:

   We will not pay for loss or damage caused directly or indirectly by any of the following.  Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

The primary policy also excluded water damage.    

    The parties stipulated that if the RSUI policy incorporated the anti-concurrent causation clause and water exclusion, the total losses would not reach RSUI's coverage layer.  The district court awarded ARM its full claim of $5.5 million.

   Two provisions of the RSUI policy directly referenced the primary policy and expressly incorporated the primary polices coverage parameters.  First, under the "Insuring Clause," RSUI agreed to "indemnify in respect of direct physical loss or damage to the property . . . which are also covered by and defined in the [primary policy]."  Second, the "Maintenance of Primary Insurance Clause" provided, "this policy is subject to the same warranties, terms and conditions . . . as are contained in or as may be added to the primary policy." 

    The Fifth Circuit held that taken together, these two clauses meant the RSUI policy only covered damage that was also covered by the primary policy and excluded any damage excluded by that policy.  The plain language of the anti-concurrent causation clause and water exclusion, read together, excluded from coverage any damage caused by a combination of wind and water.  Thus, the combined wind-water damage at issue here was a peril expressly excluded from coverage by the primary policy.  The  anti-concurrent causation clause and water exclusion were therefore expressly incorporated by the RSUI policy pursuant to the Insuring Clause and the Maintenance of Primary Insurance Clause.  Accordingly, the district court was reversed.

Fees Not Available Under Hawaii's Assumpsit Statute for Declaratory Judgment Actions

   The Hawaii Intermediate Court of Appeals overturned an award of attorney fees in a declaratory relief action filed by the insurer.  See Allstate Ins. Co. v. Silva, 2010 Haw. App. LEXIS 806 (Haw. Ct. App. Dec. 9, 2010).

   Silva was injured on his motorcycle when struck by an auto driven by Ponce.  Silva sued Ponce for negligence and requested, among other relief, reasonable attorney fees.  Ponce defaulted.  Silva wrote to Ponce's auto insurer, Allstate, requesting its position on the matter.

   Allstate filed an action for declaratory relief, seeking to establish that neither Ponce nor Silva were entitled to coverage.  The Circuit Court granted declaratory relief to Allstate.  The Hawaii Supreme Court vacated the Circuit Court's decision, holding that Allstate had a duty to defend and/or indemnify under the policy.  Allstate then paid $25,000 to Silva, the policy limits for bodily injury. 

   Two years later, Silva filed a motion for entry of judgment and attorney fees.  Allstate opposed the motion, arguing the case was moot because policy limits had been paid.  Further, Allstate argued attorney fees were unavailable under Haw. Rev. Stat. 607-14 because its declaratory relief action was not in the nature of assumpsit, as required by the assumpsit fee statute. 

   Nevertheless, the Circuit Court granted the request for Entry of Judgment and Silva's request for fees under Haw. Rev. Stat. 607-14.  Ponce had assigned to Silva all claims for relief Ponce had against Allstate, including a breach of contract claim based on Allstate's initial failure to pay the liability claim.

   The ICA vacated the judgment and award of fees.  Allstate only sought a declaration as to its rights or responsibilities as the insurer, not money damages.  Thus, its declaratory relief action was not in the nature of assumpsit and the Circuit Court erred in awarding fees to Silva under Haw. Rev. Stat. 607-14.

Bloggers' Article on "Judicial Takings" Case Published

   The Vermont Law Review has published an article authored by Damon Key bloggers, Robert Thomas, Mark Murakami and me on the Supreme Court's "judicial takings" case from last term.  See Of Woodchucks and Prune Yards: A View of Judicial Takings From the Trenches, 35 Vt. L. Rev. 437 (2010).

   Our article discusses the U.S. Supreme Court's recent decision in Stop the Beach Renourishment, Inc. v. Florida Dep't of Environmental Protection, No. 08-11 (June 17, 2010).  The Supreme Court discussed whether Florida's renourishment of beaches and creation of a new erosion control line replacing the mean high water line was a "judicial taking."  Although the court found there was no judicial taking in this case, our article notes the court did not discredit the viability of the doctrine. 

   Robert, Mark and I also co-authored an amicus brief supporting the property owners in the case.

   Robert's post this morning has a detailed review of our article.

 

Collapse of Structure Covered as Ensuing Loss

   The insureds extensively remodeled their home and installed decks from 1995 to 1996.  See Sprague v. Safeco Ins. Co. of Am., 2010 Wash. App. Ct. LEXIS 2419 (Wash. Ct. App., Nov. 1, 2001).  The decks were supported by "fin walls."  In May 2008, the insureds discovered decay in the fin walls and filed a claim with their insurer, Safeco. 

    Safeco hired an independent expert to investigate the claim.  The investigation revealed that the decayed wood posts in each of the six piers supporting the deck resulted in a substantial impairment of structural integrity and were in a state of imminent collapse.  The expert determined that these conditions occurred prior to 2003, when Safeco first started limiting its collapse coverage.

   The policy specifically excluded damage as a result of construction defects and rot.  But the policy further provided, "any ensuing loss not excluded is covered."  Safeco denied coverage because the cause of the loss was defective workmanship and rot.  The insured argued that collapse was an ensuing loss and thus covered.  The trial court granted summary judgment to Safeco.

   On appeal, the insured maintained that since collapse was not specifically excluded in the polices between 1999 and 2003, it was a covered loss under the ensuing loss  language in the policy.  The court agreed.  The losses that were faulty construction and rot were not covered, but the "ensuing losses," those that resulted from such faulty construction or rot, were covered because such an ensuing loss was not excluded elsewhere in the policy.  Since Safeco's own experts agreed that the damage to the fin walls placed the decks in a state of imminent collapse, there was no factual dispute.  Although Safeco's post 2003 policies defined collapse to mean actually falling down, this was immaterial.  Because the parties agreed that damage occurred prior to 2003, the subsequent definition of collapse did not apply.

Agent's Alleged Negligence In Discouraging Need For Flood Insurance Presents Factual Issue

   When the insureds purchased their home along the Mississippi Gulf coast, they discussed obtaining property insurance with Richard Schmidt, a Nationwide insurance salesman employed by Felsher Insurance Agency.  See Mladineo v. Schmidt, 2010 Miss. LEXIS 569 (Miss. Oct. 28, 2010).  The insureds' complaint alleged they told Schmidt they desired a policy with full protection from all weather conditions.  Schmidt allegedly informed them they needed a hurricane policy, but would not need a separate flood policy in order to be covered for all wind and water damage.  Schmidt further informed the insureds their property was not located in a flood zone.

   The insured's agreed to purchase a "hurricane policy," which became effective the day the insureds closed on the purchase of their new home.  The policy, however, was not received by the insureds for another six weeks.  Upon receipt, the insureds filed the policy without ever reading it.  The policy provided that hurricane coverage did not include loss caused by flooding.  Further, loss resulting from water was not covered even if other perils contributed directly or indirectly to cause the loss.

   Hurricane Katrina caused extensive damage to the insureds' home on August 29, 2005.  Nationwide denied coverage for damage to the home caused by water.  The insureds alleged that in subsequent conversations, Schmidt admitted he never indicated that an exclusion existed in the policy for water damage.  Moreover, the insureds subsequently learned that a portion of their property was in a flood zone.  The insureds sued Nationwide, Felsher and Schmidt on a variety of claims for negligence, negligent misrepresentation and tortious breach of contract.  The trial court granted defendants' motion for summary judgment on all claims.  The insureds' reliance on Schmidt's representations that contradicted the policy was per se unreasonable.

   The Mississippi Supreme Court affirmed in part and reversed in part.  Having possession of the policy for four months before Katrina hit was enough time to have read the policy.  Therefore, the insureds were imputed with knowledge of the policy's contents.  Nonetheless, if an insurance agent offered advice, he had a duty to exercise reasonable care.  Accordingly, there was a question of fact whether Schmidt breached his duty of care by allegedly stating the property was not in a flood zone and counseling against flood insurance.  Further, there was a question of fact whether any such breach proximately caused any damages such as uninsured claims resulting from a lack of flood coverage.  Consequently, summary judgment was improperly granted to defendants on the negligence issue.

   The trial court properly granted summary judgment on the negligent misrepresentation claim, however.  The insureds could not have reasonably relied on the alleged assurances of coverage by Schmidt that directly contradicted the plain language of the policy they had in their possession.

Water Damage Occurring Simultaneously With Excluded Peril Is Not Ensuing Loss

  The insured's claim for business interruption losses resulting from the city's vacate order was not covered as an ensuing loss in Rapid Park Indus. v. Great N. Ins. Co., 2010 U.S. Dist. LEXIS 115747 (S.D.N.Y. Oct. 15, 2010).

    The insured leased a parking garage.  Great Northern insured the premises under a business owners' policy.  The policy included coverage for "Business Income with Extra Expense" subject to certain exclusions and limitations.

    The insured was notified by the city that it had to vacate the premises because the floor-slab had deteriorated, exposing rebars.  Further cracks and sagging created a danger of collapse.  When a claim adjuster visited the site, he determined there was no danger of imminent collapse and that the garage could have been repaired.  His report suggested that the garage's deterioration was caused by water.

      Great Northern denied coverage based on four exclusions for "Planning, Design, Materials or Maintenance," "Settling," "Wear and Tear," and "Acts and Decisions."  These exclusions exempted from coverage losses or damage caused by, among other things, faulty workmanship, inadequate maintenance, defective design, cracking, settling, wear and tear, and deterioration.

    The insured admitted the damage was caused by "deterioration," but argued exceptions to some of the exclusions provided coverage for "ensuing loss or damage caused by or resulting from" water.  The court disagreed.  While there was evidence that water played some role in causing the garage's deterioration, there was no basis for concluding that the relevant damage was "ensuing," i.e., taking place afterward.  Other courts construing exclusions for deterioration, wear and tear, rotting, dampness, etc., refused to apply an ensuing loss exception to cover water damage where water was arguably a cause of the damage, but not a consequence of the otherwise excluded peril.

    Because there was no indication that water damage was subsequent or collateral to a covered peril, and thus caused an "ensuing" loss, the insured failed to identify an exception to the otherwise applicable exclusions to coverage under the Policy.

Excluded Loss Does Not Constitute Resulting Loss

   The collapse of shoring equipment raised the issue of whether loss of the concrete slab it supported was covered as a resulting loss.  The court answered no in Vision One, LLC v. Philadelphia Indemn. Ins. Co., 2010 Wash. App. LEXIS 2322 (Wash. Ct. App. Oct. 19, 2010).

   A structural engineer examined the shoring design drawings and concluded that the design was adequate for supporting the poured concrete, but the design was marginal and did not allow for any inadequacies in the shoring installation. 

   The insured's policy excluded loss caused by defective design and by faulty workmanship.  But the exclusion provided coverage for resulting losses: "[I]f loss by any of the Covered Causes of Loss results, we will pay for that resulting loss."  The insurer denied coverage, explaining the only cause of loss was the defective design and faulty workmanship.  There was no separate and independent loss that resulted in the claimed damage.  Therefore, the "resulting loss" provision did not apply.

   The trial court ruled that because the shoring equipment and concrete slab were "separate and distinct," the concrete collapse was covered under the resulting loss provision.  The trial court further ruled that if one cause of loss was covered, then all loss was covered.

   The Court of Appeals reversed.  The court first noted that the term "cause" in the exclusion meant the "efficient proximate cause" of the loss.  The efficient proximate cause was the predominate cause which set into motion the chain of events producing the loss.  Whenever covered and excluded perils combined to cause a loss, it would be covered only if the predominant or efficient proximate cause was a covered peril.

   Here, the cause of the shoring and concrete slab collapse remained in dispute.  The parties argued that multiple perils, some covered and some excluded, caused the collapse.  The resulting loss provision applied only if faulty workmanship caused the collapse.  Thus, when the trial court ruled that the collapse was covered under the resulting loss provision, it essentially ruled that the collapse was caused by faulty workmanship.  The cause of the collapse, however, was a question of fact for the jury.

   Accordingly, the trial court's resulting loss ruling was reversed and remanded for a jury to determine which of the alleged causes - faulty workmanship, defective design, and/or faulty equipment - caused the collapse. If the jury found that multiple causes contributed to the collapse, then it had to determine which cause was the predominant or efficient proximate cause.

   The court then considered whether the concrete slab's collapse was a resulting loss under the faulty workmanship resulting loss provision.  The provision applied when an excluded peril caused a separate and independent covered peril.  The court referred to an example from the 1906 San Francisco earthquake, which caused gas-fed fires creating even more damage across the city.  Most property insurance policies excluded earthquake damage but covered fire damage.  Because an excluded peril (earthquake) caused an independent covered peril (fire), the resulting fire damage was covered as a "resulting loss."  But the earthquake damage remained uncovered.

   Here, assuming faulty workmanship caused the shoring and concrete slab to collapse, faulty workmanship was the initial excluded peril and the collapse was the loss. There was no independent covered peril (such as fire) that caused a covered resulting loss.  The collapse resulted directly from the initial excluded peril of faulty workmanship, and loss resulting directly from the initial excluded peril remained uncovered.

   Accordingly, the concrete slab collapse did not qualify as a resulting loss.  Even if a jury determined that faulty workmanship caused the collapse, the resulting loss exception did not apply.  The case was nevertheless remanded for a jury to determine causation because the insured argued that faulty equipment, a covered peril, contributed to the collapse. 

We Make Three Years

    We survived another year.  We've reached the three year anniversary of insurancelawhawaii.com.  We appreciate the increasing number of visits to our site and the various comments being submitted. 

    No doubt, blogging is a time-consuming venture, as we seek to maintain content that is fresh and updated.  Blogging is not a bad learning tool, however, as we attempt to keep abreast of insurance issues in Hawai`i and elsewhere. 

   Again, thanks is extended to fellow Damon Key bloggers, Robert Thomas (http://www.inversecomdemnation.com), Mark Murakami (http://www.oceanlawhawaiil.com), and Rebecca Copeland (http://www.recordonappeal.com) for sending ideas and cases for posts. 

    We intend to continue reading, learning, listening, and writing over the next year.  Please continue to visit.

Loss Resulting From Excluded Cause Is Not Ensuing Loss

   Preparing for a presentation at the March 2011 ABA, Insurance Coverage Litigation Committee's seminar, my Lexis search function is set to find cases on ensuing loss.  One such find was TMW Enter., Inc. v. Federal Ins. Co., 619 F.3d 574 (6th Cir. 2010). 

   TMW purchased a recently constructed condominium and retail building.  TMW insured the property for $10 million with an all-risk policy from Federal Insurance.  The policy covered any "direct physical loss or damage" to the property unless "caused by or resulting from" an excluded peril.  The policy excluded coverage for "loss or damage . . . caused by or resulting from . . . faulty . . . workmanship . . . [or] construction."  The exclusion did not apply, however, "to ensuing loss or damage caused by or resulting from a peril not otherwise excluded."

   When TMW started renovations to the building, they discovered the original builder had improperly constructed the exterior walls, leaving them vulnerable to water infiltration.  Water had entered the building, weakening the structural integrity of the building by corroding its steel structure.  TMW spent more than $3.9 million to repair the building. 

   When TMW tendered to Federal, coverage was denied because damage caused by "construction defects" and "wear and tear" was excluded.  When TMW filed suit, the district court granted summary judgment to Federal.

   On appeal, TMW argued that although faulty workmanship allowed water to seep into the walls of the building, intruding water caused damage.  Water-related damage was not otherwise excluded, making it an "ensuing loss" that was covered.  The court disagreed.  TMW's chain of reasoning - that the water technically was the final causative agent of the damage, as opposed to the faulty construction, that "water damage" was not specifically excluded from the policy, that coverage accordingly applies- essentially eliminated the exclusion.  Instead, the ensuing loss provision established that damages occurring later in time "caused" by "a peril not otherwise excluded" remained covered.

   The case was remanded, however, to allow TMW the opportunity to demonstrate that some losses may have occurred that were not proximately caused by faulty workmanship, and thus were potentially covered as an ensuing loss.