Insurance Law Hawaii

Post-Loss Assignment Without Consent Of Insurers Invalid

   Following recent Fifth Circuit precedent, the federal district court ruled that the assignment made after the loss without the insurers consent was invalid.  See Nautilus Ins. Co. v. Concierge Care Nursing Centers, Inc., 2010 U.S. Dist. LEXIS 136842 (S. D. Tex. Dec 28, 2010).

   In 1999, Brae Burn Construction Company Inc. entered into a contract to build a skilled nursing facility for Concierge.  Brae Burn had several subcontractors who were insured by their own insurers.  In August 2000, Concierge took possession of the building.

   Thereafter, Concierge sued Brae Burn for alleged damage to the building, including water leaks and mold.  In August 2008, Concierge and Brae Burn settled for $3 million.  As part of the settlement, Brae Burn assigned its claims against the subcontractor's insurers. 

   The insurers filed suit for a declaratory judgment seeking to establish that Concierge did not have coverage under any of the relevant policies.  The insurers movedfor summary judgment arguing that any purported assignment of Brae Burn's claims against the insurers was invalid under the anti-assignment provisions of the policies.  These provisions barred assignment of any rights and duties under the policy without the insurer's written consent.

   Concierge argued that the anti-assignment provisons did not apply to post-loss assignments.  The court disagreed, determining that the Fifth Circuit's decision in Keller Found., Inc. v. Wausau Underwriters Ins. Co. [post here] held that non-assignment clauses were enforceable in Texas even for assignments made post-loss.  The Fifth Circuit rejected the argument that the insurance company must show prejudice in order to enforce the anti-assignment clause.

   Here, the anti-assignment provisions of the policies precluded assignment of Brae Burn's rights to Concierge absent written consent of the insurers.  Because there was no written consent, there were no valid assignments.

 

Seventh Circuit Remands Construction Defect Case In Light of Sheehan

   In a prior post, we noted the Indiana Supreme Court held that the CGL policy covers damage to a home structure resulting from shoddy subcontractor work unless the subcontractor work was intentionally faulty.  See Sheehan Constr. Co. v. Cont'l Cas. Co., 935 N.E. 2d 160 (Ind. 2010).  In a subsequent construction defect case, the Seventh Circuit reversed the district court's decision in favor of the insurer and remanded for reconsideration in light of Sheehan.  See Trinity Homes LLC v. Ohio Cas. Ins. Co., 2010 U.S. App. LEXIS 25983 (7th Cir. Dec. 22, 2010).

   The insured entered into thousands of contracts to build homes.  Each contract provided the insured would be the general contractor and warranted that the homes would be free of defects caused by poor workmanship.  The insured hired a number of subcontractors to do the actual home construction.

   Due to faulty work done by the subcontractors, a number of the homes were plagued with structural problems.  These defects allowed water to enter the homes, which in turn resulted in physical damage to the residences and health problems for the occupants.  In thirteen different suits, including multiple class actions, the homeowners sued the insured for the costs associated with remedying the subcontractor's deficient work.

   The insured had multiple primary CGL policies and an umbrella policy with Cincinnati Insurance Company that covered liability in excess of or not covered by the CGL policies.  None of the insurers would defend the insured.  When the insured sued, most of the CGL carriers settled for at least 75% of the policy limit, with the insured being responsible for the remainder of the limit, functionally exhausting the CGL policy. Ohio Causality, however, claimed the damage arising from faulty subcontractor work was not "property damage" caused by an "occurrence" within the meaning of its CGL policy.  Cincinnati Insurance also argued its umbrella policy was not triggered because a number of the CGL policies were neither completely exhausted nor otherwise unavailable.

   On cross motions for summary judgment, the district court ruled for the insurers.  Ohio Casualty's policy did not cover the underlying home damage.  Cincinnati Insurance was not obligated to provide coverage because the district court ruled some of the CGL policies were still available.

   The Seventh Circuit reversed.  The summary judgment in favor of Ohio Casualty was reversed in light of Sheehan.  The applicability of any exclusions or limitations in the policy was left for the district court on remand.

   Turning to the umbrella policy, the insured argued the policy was triggered because no remaining CGL coverage was available.  Some of its CGL insurers denied coverage, while others entered into settlement agreements that functionally exhausted the CGL policies. The umbrella policy promised to pay the "'ultimate net loss' which the insured is legally obligated to pay as damages in excess of the 'underlying insurance' . . . ."  The Limits of Insurance clause stated once the limits of the underlying insurance were exhausted by payment of claims, the umbrella policy would continue in force as the underlying policy.

   Although the district court held that the umbrella policy required exhaustion of the CGL limit by the insurer payout alone, the Seventh Circuit disagreed.  While the umbrella policy stated that a CGL policy was exhausted when the policy limit had been completely expended, it did not clearly provide that the full limit must be paid out by a CGL insurer alone.  Therefore, the policy was ambiguous.  The insurer's interpretation that the CGL policy could be exhausted when an insured and the CGL insurer entered into a settlement agreement where the insurer paid a large percentage of the total limit and the insured paid the remainder was reasonable.

Indiana Court Adopts Uniform, Not Site-Specific, Interpretation of Pollution Exclusion

   Where the insured faces environmental suits in several states, should the law governing the liability policy be "site-specific," meaning the law of each state in which allegations of injury or property damage arise governs the policy's interpretation, or "uniform," whereby a single state's law governs?  In Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Standard Fusee Corp., No. 49S04-1006-CV-318 (Ind., Dec. 29, 2010) (opinion here), the court favored a uniform interpretation.    

   Standard Fusee Corporation (SFC) manufactured emergency signaling flares.  The company was incorporated in Delaware and headquartered in Maryland.  SFC had operations in Maryland, Indiana, and Pennsylvania.  In 2002, SFC learned that a chemical it used in the production of flares had been discovered in groundwater samples at its former California facility.  More than 200 lawsuits were filed against SFC in California, but they were ultimately dismissed when it was determined that SFC never discharged the chemical there.  After SFC voluntarily tested its Indiana facility in 2004, however, it found potential contamination.  SFC then applied for and was granted inclusion in the state's voluntary remediation program. 

   SFC had CGL, excess and umbrella policies from various insurers.  SFC requested defense and indemnification from the insurers with respect to the proceedings in California and Indiana.  The insurers refused to provide coverage.

   SFC sued for declaratory judgment and moved for partial summary judgment, arguing that Indiana law governed the interpretation of the policies and that the insurers had a duty to defend.  The trial court granted the motion.  The Court of Appeals reversed, adopting a "site-specific" approach to choice of law, whereby Indiana law governed the interpretation of the policies with respect to the Indiana site and California law with respect to the California site.

   The Indiana Supreme Court reversed the Court of Appeals.  The uniform approach was more consistent with Indiana's choice-of-law jurisprudence and applied in cases involving multi-site, multi-state insurance policies.  In insurance contract cases, Indiana courts first attempted to determine the principal location of the insured risk.  If no such location existed, a determination was made as to which state had the most intimate contacts. 

   Here, SFC was headquartered in Maryland.  This suggested that Maryland was the principal location of the insured risk.  As the state with the most intimate contact, the court held that the substantive law of Maryland applied to the entire dispute.

  

No Coverage for Damages or Losses Resulting from Chinese Drywall

   In this multi-district litigation, the court considered the insurers' motions to dismiss plaintiffs' suits for alleged property damage caused by Chinese drywall.  In Re: Chinese Manufacture Drywall Products Liability Litigation, 2010 U.S. Dist. LEXIS 133497 (E.D. La. Dec. 16, 2010).  After determining there was coverage, the court considered several exclusions and the ensuing loss provisions in the various policies.  Ultimately, the court found no coverage and granted the motions to dismiss.

   Plaintiffs filed suit against the manufacturers, distributors, sellers and installers of Chinese drywall and their insurers.  Plaintiffs alleged the drywall emitted foul odors, and damaged metal and electronic elements and devices in their homes.     

   Considering the insurers' motions to dismiss and for judgment on the pleadings filed by several of the insurers, the court initially noted that the policies all defined "property damage" to include loss of use of tangible property.  Therefore, the damage caused by the Chinese drywall constituted a covered physical loss since the drywall prevented the Plaintiffs from fully using and enjoying their homes. 

   The Court then turned to the policies' exclusions.  First, the insurers failed to meet their burden to demonstrate that the damage caused by the Chinese drywall was a latent defect.  Second, the pollution and/or contamination exclusion was not applicable.  The Chinese drywall was not environmental pollution as contemplated by the Louisiana Supreme Court's analysis of the exclusion.  Moreover, the Plaintiff homeowners were not the typical polluters to whom the exclusion was intended to be directed.

   However, the court ruled that two exclusions were applicable.  First, damages were excluded because the Chinese drywall was faulty material.  The court found that "faulty material" constitutes a physical thing tainted by imperfection or impairment.  The court further noted that it was inconsistent to argue that Plaintiffs had suffered a loss due to the Chinese drywall, but that the drywall was not in any way faulty. The whole basis of the Plaintiffs' claims was that the Chinese drywall was faulty and rendered the homes unlivable.

   Second, the corrosion exclusion was applicable. Plaintiffs contended their loss was not caused by corrosion, but rather caused by the sulfur gases emitted by the Chinese drywall.  The court disagreed.  Plaintiffs' complaints alleged that the Chinese drywall released gases which caused corrosion to metallic and electrical components in their homes.  These allegations triggered the corrosion exclusion since the corrosion was responsible for the majority of losses suffered by Plaintiffs.

   Finally, the court turned to the ensuing loss provision.  The policies covered ensuing or resulting losses which (1) constitute covered losses, (2) were not excepted from coverage by any coverage exclusion.  Elsewhere, the court explained that the damage had to fall under the exclusion and the ensuing damage had to be a separable event, meaning the damage and the ensuing loss must be different in kind, not just degree.

   Here, Plaintiffs alleged that the gases emitted by the Chinese drywall caused (1) odors, and (2) corrosion of metal components and electrical wiring and devises.  The court found the odors were not ensuing because they were neither sufficiently different in kind from the losses caused by the Chinese drywall, nor the result of an extraneous event.  Further, the corrosion-related losses were not ensuing losses.  Even if the corrosion or corrosion-caused losses due to the Chinese drywall were ensuing or resulting losses, they would still not be covered because corrosion and corrosion-related losses were specifically excluded from coverage.

   Nevertheless, it was possible that in the future ensuing losses could occur.  Even the insurers conceded that if the corrosion caused by Chinese drywall resulted in a second accident, separable and different in kind, such as a fire, the losses therefrom would be covered as an ensuing loss.

Justice Alito's Insurance Coverage Decisions

   United States Supreme Court Justice Samuel Alito will participate in the University of Hawaii law school's Jurists-in-Residence Program the week of January 24, 2011.  In honor Justice Alito's visit, we offer a sampling of insurance coverage decisions he has authored. 

   We did not locate any insurance coverage opinions Justice Alito has written while serving on the Supreme Court.  He did write, however, several insurance coverage decisions will sitting on the Third Circuit Court of Appeals.  The cases frequently tackled complex insurance coverage issues involving a variety of commercial and business transactions.  From this sampling, Justice Alito's pro-policy holder and pro-insurer decisions are fairly evenly divided.

   Special thanks to fellow Damon Key blogger, Mark Murakami (www.hawaiioceanlaw.com), for his help in locating these cases.

Cases Favorable to Insureds:

1)  MBIA Ins. Corp. v. Royal Indemn. Co., 426 F.3d 204 (3d Cir. 2005) 

   The Student Finance Corporation ("SFC") made loans to vocational students.  Wilmington Trust and Wells Fargo loaned money to SFC, and took a pool of student loans as security. 

   To encourage these loans, SFC obtained policies with Royal to insure the repayment of interest and principal on the student loans.  The policies stated Royal's liability would be unaffected by fraud and expressly waived any defense it could otherwise raise to avoid payment.  When it turned out SFC was running a ponzi scheme and unable to repay the loans, Wilmington and Wells Fargo sought indemnity from Royal. 

   Royal argued there was no coverage because SFC's fraudulent inducement entitled it to rescission.  The district court found the policies unambiguously waived fraud in the inducement as a defense.  It granted summary judgment to Wilmington and Wells Fargo.  The court ordered Royal to pay $269 million to Wells Fargo and $12.9 million to Wilmington.

   Judge Alito's decision on appeal upheld the district court, in part.  On their face, the policies waived Royal's defense to payment based on fraud.  The remainder of the decision was vacated, however. Triable issues remained regarding whether all of the claimed losses were covered under the policies and whether the Wilmington and Wells Fargo's claims had been properly documented.

2)  Acands, Inc. v. Travelers Casualty and Sur. Co., 435 F.3d 252 (3d Cir. 2006)

   This case involved a mix between bankruptcy law and insurance coverage issues under a complex formula for making payment of asbestos claims between Acands and Travelers.   

   Acands was insured between 1976 and 1979 by Travelers' predecessor, Aetna.  Two types of coverage were offered.  The products coverage was capped by a $1 million per occurrence limit and a $1 million aggregate limit.  The operations coverage was limited by a $1 million per occurrence limit but had no aggregate copay, meaning Travelers' exposure to asbestos claims during the years 1976 to 1979 was potentially unlimited. 

   A letter agreement between Acands and Travelers was reached in 1988, allocating 55% of the claims to products and the remaining 45% to operations.  Because of the aggregate limit on products coverage, Travelers remained liable for only the 45% of claims allocated to operations.  The allocation in the letter agreement could be challenged by mediation, followed by binding arbitration.

   Mediation was attempted in 2001, but failed. After the arbitration panel found in favor of Travelers, but before the award was issued, Acands settled many claims, totaling more that $2.6 billion, and then filed for bankruptcy.  Acands filed a motion in district court to have the arbitration award vacated.  The district court denied the motion and affirmed the arbitration award.

   On appeal, Judge Alito's decision vacated the district court's order.  Issuing the arbitration award violated the automatic bankruptcy stay.  The arbitration award was also invalid because it diminished the property of the estate. 

3)  Lawson v. Fortis Ins. Co., 301 F.3d 159 (3d Cir. 2002)

   Two days prior to the effective date of a health insurance policy, the insured's minor child went to the emergency room for treatment of what was initially diagnosed as a respiratory tract infection.  One week later, and after the policy became effective, the condition was discovered to be leukemia.  Fortis denied coverage on the ground that the leukemia was a pre-existing condition for which the minor child had received treatment prior to the effective date of the policy. 

   The parents filed suit and the district court granted summary judgment in their favor.  Through Judge Alito's opinion, the Third Circuit affirmed.  The leukemia was not pre-existing because one could not receive treatment for a condition without knowledge of what the condition was.  The best reading of the policy was for coverage of leukemia treatment.  Otherwise, the policy language was ambiguous, which was then construed in the minor's favor.

4)  Fisher v. USAA Casualty Ins. Co., 973 F.2d 1103 (3d Cir. 1992)

   USAA argued it was relieved of its obligations under an auto policy because the insured had failed to obtain its consent before settling with the tortfeasor.  The insured's daughter was killed in 1986 when her truck collided with the automobile she was driving.  Her father sued the driver's employer and offered to settle for $1 million dollars, the limit of the employer's insurance coverage.  The insured then wrote to his auto insurer, USAA, in May 1987 regarding the proposed settlement.  Thereafter, the insured settled with the employer for $1 million in December 1987.

   The insured again wrote to USAA regarding the settlement and demanded $300,000 under the underinsured motorist provision of his auto policy.  When USAA refused, the insured sued.  The district court granted summary judgment to USAA because the insured had not complied with the consent provision of the policy before settling. 

  The Third Circuit reversed in an opinion by Judge Alito.  Once presented with a request for consent, an insurer was not free to deny coverage under the policy terms and later deny coverage on the ground that the insured failed to obtain its consent to settle.  Under Pennsylvania case law, it would be an unavailing effort for insured to seek the insurer's consent for the settlement when the insurer had already advised there was no coverage, and therefore no such consent was required.

   Nor could an insurer, once presented with a demand for consent, unduly delay its decision regarding coverage.  Instead, the insurer had to either: (a) deny coverage, allowing the insured to settle and then litigate the issue of policy coverage at a later date; (b) admit coverage and grant consent; or (c) admit coverage, deny consent, pay the insured's claim and pursue subrogation rights against the tortfeasor.  Once the insurer was presented with a demand for consent, it had to exercise one of these options without undue delay.

   Accordingly, USAA could not deny coverage on the ground that the insured had failed to obatin USAA's consent to settle with the tortfeasor.

Cases Favorable to Insurers:

1)  Acceptance Ins. Co. v. Sloan, 263 F.3d 278 (3d Cir. 2001)

     The Mon Valley Steel Co. had a general liability policy with Acceptance for mining operations at the Clyde Mine in Pennsylvania.  The policy was effective from December 7, 1994 to January 24, 1996.  When premiums were not paid, however, Acceptance cancelled the policy on July 15, 1995.  The State Department of Environmental Protection ("DEP") was not notified of the cancellation.  The policy, however, contained no provision requiring Acceptance to notify DEP before canceling the policy.

   In March 1998, Mon Valley was sued by plainiffs for the death of their daughter after she was pushed through an open mine shaft.  Acceptance filed suit for a declaratory judgment seeking a determination that there was no coverage because the policy had been cancelled. The district court granted summary judgment to Mon Valley because DEP had never been notified of the policy's cancellation.

   Judge Alito's decision reversed.  Acceptance had neither a statutory duty nor a duty under the policy to notify DEP of cancellation of the policy.

2)  Ford v. Schering-Plough Corp., 145 F.3d 601 (3d Cir. 1998)

   Plaintiff became disabled by virtue of a mental disorder and was unable to continue her employment.  While employed, she had enrolled in the employee welfare benefits plan offered by the employer through Met Life.  The plan provided that benefits for physical disabilities would continue until the disabled employee reached age sixty-five so long as the physical disability persisted.  For mental disabilities, however, the plan mandated that benefits cease after two years if the disabled employee was not hospitalized. 

   Plaintiff filed a charge of discrimination with the EEOC and received a "right-to-sue" letter.  She then sued her employer and MetLife, alleging discrimination in violation of the Americans with Disabilities Act ("ADA").  The district court granted the defendants' motion to dismiss for failure to state a claim.

   On appeal, the Third Circuit, through Judge Alito, affirmed.  The ADA did not require equal coverage for every type of disability.  Moreover, the challenged disability benefits did not qualify as public accommodation for purposes of the ADA. 

3)  John Wyeth & Brother Ltd. v. CIGNA Int'l Corp., 119 F.3d 1070 (3d Cir. 1997)

   This case involved an English pharmaceutical company's effort to keep its lawsuit located in the United States.  Commencing in 1987, Wyeth was sued in more than 11,000 product liability cases in the United Kingdom and Ireland.  The suits were mostly for the manufacture and sale of Ativan, a tranquilizer that allegedly caused dependency and a number of other side effects. 

   Wyeth was insured by different carriers for three different time periods.  For claims from 1972 to 1977, Wyeth was insured by Guardian Royal Exchange Assurance, Limited ("GRE").  CIGNA's predecessor was Wyeth's insurer for the period from 1977 to 1980.  And from 1980, Wyeth was self insured.  As of July 1989, GRE and CIGNA refused to defend, however, because they had not yet determined which policies were triggered by the underlying claims. 

   Consequently, in 1990, the parites entered an agreement to allocate defense costs for the Ativan-related claims.  The parties agreed that each would pay one-third of the defense costs, but reserved rights to argue for a different allocation at a later date.  The agreement could be terminated by any party.  Further, the agreement stated it would be governed by and construed in accordance with English law and the English courts "would have exclusive jurisdiction in relation to any dispute arising under . . . the agreement."

   When a dispute arose over the allocation and unpaid defense costs, Wyeth sued CIGNA in the federal district court in Pennsylvania, seeking a declaratory judgment.  CIGNA argued that the suit for unreimbursed expenses "related to" the 1990 Agreement and was therefore subject to the 1990 Agreement's forum selection clause.  The district court agreed and granted summary judgment to CIGNA.

   Judge Alito's opinion affirmed the district court.  The dispute between Wyeth and CIGNA over payment of defense costs arose in relation to the 1990 Agreement.  These sophisticated business entities had agreed that the English courts had exclusive jurisdiction over "any dispute arising in . . . relating to" the 1990 Agreement.  Therefore, they were bound by this sweeping language.

4)  Armotek Indus., Inc. v. Employers Ins. of Wausau, 952 F.2d 756 (3d CIr. 1991)

   Armotek was insured by Wausau's general liability policies from 1979 to 1985.  "Property damage" was defined in the policies to include "physical injury to property which occurs during the policy period."  The policies contained a standard pollution exclusion clause that excluded coverage for property damage caused by pollution unless the "discharge, disbursal, release or escape" of pollution was "sudden and accidental." 

   In 1979, Armotek acquired Chambers-Storch Company, which operated a chrome-plating plant in Norwich, Connecticut.  In 1985, the Connecticut Department of Environmental Protection ("DEP") ordered Armotek to remediate pollution at the plant.  Armotek sought coverage under the Wausau policies, but Wausau declined.

   When Armotek sued for the expenses of the remediation, the court granted summary judgment to Wausau.  The court observed that Armotek was seeking coverage for expenses incurred as a result of a spill of chromic acid that occurred in 1977.  Therefore, the policies in effect from 1979 to 1985 did not cover property damage caused by the 1977 spill.  Further, Wausau did not breach its duty to defend because nothing in the DEP order suggested a "sudden and accidental" release of pollution. 

   Judge Alito's opinion affirmed the district court.  Because the spill did not occur during the term of the policies, there was no coverage.  Further, because the DEP order referred to past pollution, no sudden accident under the policy occurred and no duty to defend arose.

5)  Gridley v. Cleveland Pneumatic Co., 924 F.2d 1310 (3d Cir. 1991)

   This case involved a dispute between an employer and the widow of a former employee regarding an entitlement to increased life insurance benefits. The increase was provided by an amendment to the company's group life insurance policy after the widow's husband ceased working due to terminal cancer.

   Joseph Gridley began working for Cleveland Pneumatic Company in 1985.  He was given an overview brochure which described the company's benefit plans.  The introduction to the overview brochure stated the employee could refer to the summary plan descriptions or official plan documents for more details.  

   Documents describing the life insurance plan were also given to Mr. Gridley.  These documents specified that an employee became eligible for an increase in insurance benefits only if he was "actively" at work after the increase took effect.  After Mr. Gridley ceased working, the life insurance benefits were increased to three times the employee's salary.

   After her husband died, Mrs. Gridley submitted a claim for life insurance benefits.  She received an amount based on benefits offered before the company's amendment to the group plan because her husband was not actively employed at the time of the coverage increase.  When Mrs. Gridley sued, the district court ruled in her favor because the overview brochure given to Mr. Gridley was a summary plan description under ERISA that failed to explain the active work requirement.

   The Third Circuit, through Judge Alito, reversed.  Mrs. Gridley was not entitled to the increased benefits because the brochure was not a summary plan description under ERISA.  Therefore, Mrs. Gridley was not entitled to recover under equitable estoppel on the grounds that the brochure violated the disclosure requirements of ERISA.

   Mark has written a series of posts at www.oceanlawhawaii.com on Jutice Alito's maritime-related decisions and more.  The posts are here, here, and here.

Looming Deadline for Oahu Residents To Purchase Flood Insurance At Lower Rate

   Today's Honolulu Star-Advertiser reports state officials are concerned that Oahu residents eligible for cheaper flood policy rates based upon updated federal flood maps may miss a deadline looming on Wednesday, January 19, 2010. Failing to respond by Wednesday could mean having to pay $5700 a year for flood insurance instead of $350 a year.  Hundreds of Oahu property owners affected by updated federal flood maps can lock in the cheaper rate by applying before Wednesday.

   Based upon updated FEMA flood-risk maps, several hundred parcels on Oahu were shifted into high-risk flood zones.  These properties are primarily located along Oahu's west and sought shores.

   The Star-Advertiser's full story is here.

Indemnity Agreement That May Never Be Triggered Is Still Insured Contract

   If an indemnity agreement is never triggered, is the agreement still an "insured contract" under a CGL policy?  The court in Cheramie v. ERA Helicopters, LLC, 2010 U.S.Dist. LEXIS 128611 (E.D. La. Dec. 3, 2010) answered yes.

   Dodi Cheramie, an employee of Professional Cleaning Maintenance Services, LLC ("PCMS"), sued ERA when she was injured while removing improperly loaded cargo from a helicopter.  As an additional insured, ERA demanded a defense from PCMS's liability insurer, who filed a declaratory action to determine its coverage obligations. 

   Under a maintenance agreement with ERA, PCMS agreed to indemnify ERA for claims based upon personal injury suffered by any of PCMS's employees.  Section 3.2 of the agreement also stated that ERA was the statutory employer of PCMS employees for purposes of the state workers' compensation statute. 

   The policy excluded coverage for "bodily injury" where the insured had to pay damages because of the assumption of liability under a contract or agreement.  The exclusion did not apply, however, to liability for damages "assumed in a contract or agreement that is an 'insured contract.'"  An insured contract was defined as "[t]hat part of any other contract or agreement pertaining to your business . . . under which you assume the tort liability of another to pay for  . . . 'bodily injury' to a third person or organization." 

   In its motion for summary judgment, ERA argued that the insurer owed coverage to PCMS for defense and indemnity obligations because the maintenance agreement was an insured contract even though ERA could be held to be the statutory employer of Cheramie.  Making the opposite argument, the insurer contended that the maintenance agreement was not an insured contract because ERA could not incur tort liability  by virtue of section 3.2, wherein ERA was made the statutory employer of Cheramie. 

   PCMS assumed ERA's tort liability when it entered the maintenance agreement.  Consequently, the court agreed with ERA that maintenance agreement remained an insured contract even though the indemnity provision may never be triggered if ERA had a viable statutory employer defense.  The insurer and PCMS therefore owed ERA a defense under the indemnity agreement and the policy.

Volitional Acts Negate Allegations of Negligent Misrepresentation

   The Archdiocese sought coverage under its CGL policy for allegations of sexual abuse committed by its former priests.  Because the underlying complaints alleged volitional acts rather than accidental occurrences, the court determined there was no coverage.  See Doe v. Archdiocese of Milwaukee, 2010 WISC. App. LEXIS 954 (Wis. Ct. App. Nov. 23, 2010).

   Several complaints were consolidated for appeal involving allegations of sexual abuse by the priests.  The complaints alleged causes of action for negligent misrepresentation stating that the Archdiocese represented that children were safe in the presence of the priests despite high-ranking personnel having the knowledge of the priests' histories of sexual abuse.  Further, the Archdiocese allowed the priests to have continued access to children through parishes and schools, thereby subjecting the plaintiffs to abuse.

   The Archdiocese tendered its defense to its carrier, OneBeacon Insurance Company.  OneBeacon intervened in the cases and sought a declaration of no coverage.  The trial court determined there was no coverage obligation because there was no occurrence.

   On appeal, the Archdiocese argued that because it did not intend to harm the plaintiffs, the allegations in the underlying complaints were within coverage provided by OneBeacon's policy.  OneBeacon argued there was no coverage for alleged negligent misrepresentation because there was nothing accidental about the misrepresentation.  Rather, the Archdiocese engaged in volitional acts.

   The Wisconsin appellate court agreed with OneBeacon.  By placing the children in harms way, the Archidocese's acts were volitional.  Where a volitional act was involved in a misrepresentation regarding a false statement, that act removed it from coverage as an "occurrence" under the policy.  The proper focus was not the ultimate injury the plaintiffs suffered, but rather the underlying acts of the Archdioceses that led to the plaintiffs' injuries.  The complaints alleged that agents of the Archdiocese were aware of the sexual abuse histories of some of its clergy but still kept the clergy in contact with the children.  The children were allegedly victims of molestation.  The underlying act that led to the plaintiff's injury, therefore, was the misrepresentation that the plaintiffs would be safe in the presence of the priests.  The proper focus for determining coverage, then, was on the misrepresentations leading to the molestation.

Manifestation Trigger Rules in Florida

   When property damage manifests before the policy period, but continues over time and overlaps the  CGL's policy period, does the policy provide coverage?  Applying Florida law, the U.S. District Court determined that under the manifestation trigger, there was no coverage.  See Amerisure Ins. Co. v. Albanese Popkin The Oaks Development Group, L.P., 2010 U.S. Dist. LEXIS 125918 (S.D. Fla. Nov. 30, 2010). 

   The homeowners sued the insured developer for damages arising from the installation of Chinese drywall.  The homeowners purchased their home from the insured on November 23, 2004.  The homeowners moved into their home on October 6, 2006.  Their complaint against the insured alleged property damage was sustained within the building and caused by the release of fumes and vapors from the Chinese drywall.  The homeowners initially discovered the fumes and vapors in December 2006.  Further property damage to air handling units, electrical wiring, metals and plumbing fixtures was noticed as late as April and May 2009.  In September 2009, the homeowners discovered the cause of the property damage, the Chinese drywall. 

   Amerisure issued a CGL policy to the developer for the policy period January 16, 2008 to January 16, 2009.  The policy applied to property damage only if prior to the policy period, no insured knew that the property damage had occurred.  If an insured knew property damage had occurred prior to the policy period, then any continuation of property damage during or after the policy period would deemed to have been known prior to the policy period.

   Amerisure sought declaratory relief on its coverage obligations and moved for summary judgment.  The federal court noted that under Florida case law, the time of occurrence within the meaning of an "occurrence" policy was the time at which the injury first manifested itself.  The underlying complaint alleged that the homeowners first noticed damage and odor stemming from the Chinese drywall in 2006, prior to the Amerisure policy.  Throughout 2008 and into the summer of 2009, additional damage to the air handling units was observed.  Nevertheless, the homeowners admitted that they first noticed the damage prior to the policy period.

   Therefore, there was no property damage alleged during the policy period.  The fact that the damage was continuous in nature was irrelevant under the manifestation trigger.  Consequently, there was no coverage or duty to defend, and the motion for summary judgment was granted.

   Hawaii has adopted the injury-in-fact trigger, whereby coverage is triggered by the actual occurrence during the policy period of an injury-in-fact.  See Sentinel Ins. Co. v. First Ins. Co., 875 P.2d 894, 915 (Haw. 1994).  Under the injury-in-fact trigger, "an injury occurs whether detectable or not; in other words, an injury need not manifest itself during the policy period, as long as its existence during that period can be proven in retrospect."  Id.  Had the injury-in-fact trigger applied in Amerisure Ins. Co., there likely would have been coverage.

Hawaii Court Rules Insured Is Real Party In Interest for Challenging Denied Claim

   In Wilson v. AIG, 89 Haw. 45, 968 P.2d 647 (1998), the Hawaii Supreme Court held that an insured was not the real party in interest to challenge its auto insurer's refusal to pay benefits to the insured's medical provider.   The issue before the Hawaii Intermediate Court of Appeal was whether the legislature had overruled the Supreme Court 's decision in Wilson.  See Kim v. Liberty Mut. Fire Ins .Co., 2010 Haw. App. LEXIS 888 (Haw. Ct. App. Dec. 23, 2010).

   After being involved in a motor vehicle accident, Kim had acupuncture therapy administered by his provider, Dr. Chai's Health Center Inc.  Liberty Mutual paid for the acupuncture for three and a half months, but then refused to make further payment, deciding such treatment was no longer warranted.  Kim requested a administrative hearing before the Insurance Commissioner, seeking review of Liberty Mutual's refusal to pay the bill submitted by the Health Center.  

   Relying on Wilson, the Insurance Commissioner decided in Liberty Mutual's favor.  The circuit court disagreed with the Insurance Commissioner, finding that the legislature's Act 198 effectively overruled Wilson.  Act 198, enacted in 2006, amended the no-fault law in Hawaii.  The Act's legislative history expressed its intent to overrule Wilson.  Further, the Act specifically stated that if there was a dispute between the provider and the insurer regarding payment of a claim, "the provider, insurer, or claimant may submit the dispute to the commissioner, arbitration, or court . . . ."

   The ICA agreed with the circuit court that Act 198 rendered Wilson obsolete.  Kim therefore qualified as a real party in interest to pursue her administrative action against Liberty Mutual.  The case was remanded to the Insurance Commissioner.

   For an appellate practitioner's view of the Kim case, see my Damon Key blogging colleague Rebecca Copeland's post here.