Insurance Law Hawaii

Insurer Must Defend Claims Arising From Alleged Contamination of Rice

   The insurer's duty to defend the insured against claims arising from contamination of the commercial rice supply by mixing it with genetically modified ("GM") rice was at stake in Riceland Foods, Inc. v. Liberty Mut. Ins. Co., 2011 U.S. Dist. LEXIS 61381 (E.D. Ark. June 8, 2011).

   Riceland processed and marketed rice and other agricultural commodities for its members.  Riceland was sued in over 170 lawsuits which claimed damages from the contamination of the commercial rice supply by GM rice.  The underlying suits were divided between "Grower lawsuits" filed by rice growers and "Distributor Lawsuits" filed by rice distributors.

      Liberty agreed to defend under a reservation of rights.  Riceland filed suit for declaratory judgment and Liberty filed a motion for summary judgment.

   The Grower lawsuits sought relief under theories of negligence, gross negligence, fraudulent concealment, and strict liability. Liberty argued a cross-pollination exclusion, which precluded coverage for property damage "caused in whole or in part by cross-pollination" was applicable.  Allegations of property damage in the underlying suits encompassed more than cross-pollination, however.  Based on the pleadings, it was possible that contamination of the rice occurred in the absence of cross-pollination, and the cause of contamination was a question for the trier of fact.  Therefore, Liberty was not entitled to summary judgment for the Grower lawsuits based on the cross-pollination exclusion.

   The Distributor lawsuits were filed by European companies that purchased rice from various suppliers to distribute to customers who would not accept GM rice.  The Distributor plaintiffs alleged that Riceland wrongfully supplied them with genetically modified rice, which caused lost profits and loss of inventory.  Liberty argued an endorsement excluding coverage for "property damage caused in whole or in part by . . . Mis-Delivery, Mis-Pacagking, or Mis-Labeling" relieved it of a duty to defend Riceland.  There was no indication in the underlying allegations or elsewhere, however, that the Distributor Plaintiffs were seeking relief from property damage caused in whole or in part by mis-delivery, mis-packaging, or mis-labeling.

   Finally, in two other underlying suits, the plaintiffs alleged that Riceland negligently contaminated the rice supply with GM rice, causing them to suffer damages by the drop in value of their rice product.  Liberty declined to defend, contending there were no allegations of an "occurrence."  The court disagreed.  Other courts had determined that negligent contamination of drink and food products by a harmful substance was an "occurrence" resulting in "property damage."  Here, the negligent contamination of the commercial rice supply by unapproved, unmarketable GM rice was an "occurrence" under Liberty's policies and the resulting harm to the grower plaintiffs' fields and rice crops constituted "property damage."

Ensuing Loss Provision Held Unambiguous

   At issue was whether damage caused by a crane landing on a building during a tropical storm was covered as an ensuing loss.  See Certain Interested Underwriters at Lloyd's London v. Chabad Lubavitch of Greater Ft. Lauderdale, Inc., 2011 Fla. App. LEXIS 8403 (Fla. Ct. App. June 8, 2011).

   The insured had two policies on the damaged building.  The first was an "all risk" policy issued by Lloyd's.  It included a "Windstorm or Hail Exclusion," which provided that if a loss or damage was caused by a windstorm the loss was not covered, regardless of any other cause or event that contributed to the loss.  The exclusion had an ensuing loss provision, however, which stated that if a windstorm "results in a cause of loss other than rain, snow, sand or dust, and that resulting cause of loss is a Covered Cause of Loss," the loss would be covered.  An example of the applicability of the ensuing loss provision was given: "[I]f the Windstorm or Hail damages a heating system and fire results, the loss or damage attributable to the fire is covered subject to any other applicable policy provisions."

   The second policy covered wind damage ("wind policy").  The insured claimed under this policy and received policy limits.

   Lloyd's filed suit for a declaratory judgment that the all risk policy's windstorm exclusion provision excluded coverage for the damage caused by the wind generated during the storm.  Both parties moved for summary judgment. Lloyd's argued that the insured's submission of a claim under the wind policy constituted an admission that the loss was caused by wind, and was consequently excluded. The insured countered that the crane striking the building was the cause of damage, not wind.  The trial court concluded that the windstorm exclusion was ambiguous and should be strictly construed against Lloyd's to cover the damage to the building.

   The appellate noted the plain language of the ensuing loss provision meant that if a windstorm set in motion another cause, which was not excluded by the policy, and that intervening cause resulted in a covered loss, the windstorm exception did not apply and the loss would be covered.  Therefore, the windstorm exclusion was unambiguous.

   However, the cause of the crane's falling was not determined by the trial court.  This factual determination was critical because the exclusion would only apply if the crane fell from its perch because of the force of the wind, aided only by gravity and not some other intervening cause.  Consequently, the case was remanded. 

   The dissent felt the ensuing loss provision was ambiguous.  A crane falling into the building was "a cause of loss other than rain, snow, sand or dust."  Therefore, the dissent would have affirmed summary judgment for the insured.

  

California Court Determines Horizontal Exhaustion Applies, But Underlying Limits Cannot Be Stacked

   The case involved another chapter in the long-standing coverage litigation in which the insured, Kaiser Cement and Gypsum Corporation, sought to enforce indemnity obligations against its insurers for thousands of suits filed because of asbestos exposure. See Kaiser Cement and Gypsum Corp. v. Ins. Co. of the State of Pennsylvania, 2011 Cal. App. LEXIS 686 (Cal. Ct. App. June 3, 2011). A prior ruling determined that because "occurrence" meant injurious exposure to asbestos, the thousands of claims against Kaiser were not a single occurrence.

   Between 1947 and 1987, Kaiser purchased primary policies from four different carriers, including Truck Insurance Exchange. Kaiser selected the Truck CGL policy in effect in 1974, with a $500,000 per occurrence limit, to respond initially to all claims that alleged asbestos exposure in that year. By October 2004, Truck had paid more that $50 million for asbestos bodily injury claims, and at least 39 claims resulted in payments in excess of $500,000. It filed suit for a declaration that its primary policies had been exhausted and it had no further obligation to defend or indemnify Kaiser. Truck also sued Kaiser's excess insurers and sought equitable subrogation and contribution from these defendants.  Kaiser filed cross-claims against the excess insurers seeking excess coverage under these policies.

   The issue in the present matter was determining who was responsible to indemnify Kaiser for asbestos claims that exceeded the 1974 primary policy's limit of $500,000 per occurrence? Kaiser and Truck contended that the excess insurer for 1974, The Insurance Company of the State of Pennsylvania ("ICSOP"), was responsible to pay claims over $500,000. ICSOP, however, contended that all of Kaiser's primary policy limits had to be "stacked." This meant that all Truck Policies issued to Kaiser between 1964 and 1983, as well as the other primary policies issued to Kaiser by the three other carriers between 1947 and 1987, had to be exhausted before any excess insurer had to indemnify Kaiser. 

   The trial court granted Kaiser's motion for summary judgment against ICSOP. The court ruled that the excess coverage dropped down once the $500,000 primary limit was exhausted for the primary policy.

   The court of appeal reversed. First, under both ICSOP's 1974 excess policy and the principle of "horizontal exhaustion," ICSOP was not responsible to indemnify Kaiser for losses until all primary policies were exhausted. The ICSOP policy provided that excess coverage was not applicable until Kaiser had recovered the limits of liability indicated in the schedule of underlying policies, "plus the applicable limits of any other underlying insurance collectible by the Insured." "Any other underlying insurance" meant any primary insurance available to Kaiser.

   Next the court considered what primary insurance was "collectible." ICSOP contended its excess obligations did not kick in until Kaiser collected policy limits for each year in which coverage existed. Truck and Kaiser argued that under the language of the 1974 primary policy, Truck was responsible to pay policy limits only once per occurrence, not once per occurrence per year or once per occurrence per policy. The Truck policy provided,

The limit of liabilitystated in this policy as applicable 'per occurrence' is the limit of the company's liability for each occurrence.

There is no limit to the number of occurrences for which claims may be made hereunder, however, the limit of the Company's liability as respects any occurrence involving one or any combination of the hazards or perils insured against shall not exceed the per occurrence limit designated in the Declarations.

   The court agreed with Truck and Kaiser.  The policy language meant Kaiser could not "stack" Truck's primary policy limits before the excess layer was activated. Instead, having chosen the 1974 primary policy to respond to any claims triggered by that policy, Kaiser could recover from ICSOP to the extent that a claim exceeded the $500,000 per occurrence limit specified in the 1974 primary policy.

   Nevertheless, the judgment for Kaiser had to be reversed because the record did not indicate whether the other primary policies Kaiser held had been exhausted. Therefore, the court could not determine whether ICSOP's obligation to indemnify Kaiser had attached or whether ICSOP had breached its policy with Kaiser.

Insurer Must Defend Claims Against Supplier of Chinese Drywall

   The insurer sought to avoid coverage for claims against its insured, a supplier of Chinese drywall. The court ruled, however that the exclusions relied upon by the insurer did not bar coverage. See Auto-Owners Ins. Co. v. Am. Building Materials, Inc., 2011 U.S. Dist. LEXIS 52837 (M.D. Fla. May 17, 2011).

   The insured, American Building Materials, Inc., was a supplier of drywall and other building materials. ABM supplied Chinese drywall to KM Home, a builder who install the drywall in numerous homes it was building. The homeowners complained of emissions of smelly gasses, the corrosion and blackening of metal wiring, surfaces and objects, and the failure of HVAC units and appliances. Numerous lawsuits were filed against KB Home.

   KB Home, in turn, filed suit against ABM, seeking to recover damages suffered by KM Home arising out the defective drywall supplied by ABM. ABM sought coverage under its CGL policy. The insurer filed for a declaratory judgment that it had no duty to defend or indemnify, relying on various exclusions in its policy.

   The insurer first relied on the pollution exclusion, which provided an exclusion for,

(1) . . . "[P]roperty damage" arising out of the actual alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:

(d) At or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations:

    (i) if the pollutants are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor.

    The court determined the pollution exclusion was not applicable. ABM, as a material supplier, completed its "operations" when the materials were delivered to the job site. The property damage allegedly arising from completed installation of drywall was not while ABM was performing operations, and, therefore, was not excluded under the pollution exclusion.

   Next, the insurer relied upon the "sistership" exclusion, Exclusion 2.n. This exclusion barred coverage for any expense incurred for the loss of use, recall, inspection, removal, etc.,of an insured's product if such product was "withdrawn or recalled from the market . . . because of a known or suspected defect . . . ." Here, there was no allegation that the Chinese drywall had been recalled from the market.

   Finally, the insurer relied upon the "your products" exclusion. The policy excluded coverage for "'property damage' to 'your product' arising out of it or any part of it." The policy defined "your product" as "any goods or products, other than real property." Under Florida law, improvements to real property were included in the definition of real property. Because the drywall became "real property" once it was installed, it was not within the definition of "your product" under the policy.

Anti-Assignment Provision Can Bar Post-Loss Assignments in Louisiana

   The Louisiana Supreme Court considered a certified question from the Fifth Circuit regarding the applicability of anti-assignment provisions in homeowners' policies. In Re: Katrina Canal Breaches Litigation, 2011 La. Lexis 1118 (La. May 10, 2011).

The Fifth Circuit asked,

Does an anti-assignment clause in a homeowner's insurance policy, which by its plain terms purports to bar any assignment of the policy or an interest therein without the insurer's consent, bar an insured's post-loss assignment of the insured's claims under the policy when such an assignment transfers contractual obligations, not just the right to money due?

   The back-story involved the efforts to provide relief after Hurricanes Katrina and Rita. Congress appropriated relief funds, administered by HUD, to affected states. Louisiana distributed some of its funds to the "Road Home" program, which provided grants of up to $150,000 to Louisiana homeowners to repair uninsured and under-insured property damaged by the hurricanes. Before funds were issued, the homeowners had to sign a "Limited Subrogation/Assignment Agreement" whereby any claims of future rights to reimbursement were assigned to the State. This meant some grant-eligible homeowners had little motivation to file claims or challenge low insurance settlements. Consequently, there was a one billion dollar projected shortfall in the Road Home program.

   To remedy the situation, the State sued more than 200 insurance companies pursuant to the assignments to recover under the funds granted under the Road Home program. The insurers moved to dismiss, arguing that the State's claims failed as a matter of law because anti-assignment clauses in the policies invalidated the purported assignments to the State. The federal district court denied the motion to dismiss, holding that the contractual anti-assignment provisions did not bar post-loss assignments under Louisiana law.

   On appeal, the Fifth Circuit certified the question to the Louisiana high court. The state Supreme Court's analysis started with a statute which provided, "A right cannot be assigned when the contract from which it arises prohibits the assignment of that right." The court considered whether this provision, which would appear to prohibit even post-loss assignments, violated public policy.

   The court recognized that allowing an insured to assign its right to the proceeds of an insurance policy (post-loss) did not modify the insurer's risk. The insurer's obligations were fixed at the time the loss occurred, and the insurer was obligated to cover the loss agreed to under the policy.

   Nevertheless, Louisiana law did not limit the parties' right to prohibit the assignment of insurance proceeds. There was no public policy in Louisiana favoring free assignability of claims over freedom of contract. Nor was there a public policy to prevent parties from contractually prohibiting post-loss assignments. Insurers could limit their liability and impose reasonable conditions upon the policy obligations absent a conflict with a statute or public policy.

   The court instructed, however, that the languge of the anti-assignment clause must clearly and unambiguously express that it applied to post-loss assignments.

Does Act of God Defense Absolve Boat Harbor of Liability for Tsunami-Related Damage?

   KITV reported last week that the Keehi Marine Center, owner of a boat harbor in Honolulu, and its insurer, Travelers, are denying claims for boats moored at the harbor and damaged during the March 11, 2011 tsunami. Liability is being denied because damage to the boats "occurred as a result of the tsunami, an Act of God."

   My fellow Damon Key blogger, Mark Murakami (www.hawaiioceanlaw.com) queried whether this sounded correct and suggested a post to investigate. So here goes.

   The "Act of God" defense is sparsely mentioned in Hawaii appellate court decisions. In the early case of Medeiros v. Honomu Sugar Co., 21 Haw. 155 (1912), a tree on the sugar plantation's property leaned over a public road. Plaintiff was injured as he rode by and the tree collapsed onto his carriage. In response to the sugar plantation's "Act of God" defense, plaintiff argued that the tree was obviously in a dangerous condition, which was known, or by exercise of ordinary care, could have been known, by the sugar plantation. The Hawaii Supreme Court noted that the Act of God defense was not available when the cause of harm was, in part, the intervention, neglect, or failure to act of man. The sugar plantation could not rely on the defense because, by the exercise of ordinary care, it could have known of the danger. Therefore, the sugar plantation had a duty to exercise reasonable care to prevent the tree from falling and injuring passers-by. Having failed to do so, the sugar plantation was negligent and the Act of God defense was not available. Id. at 158-59.

   A similar result was reached in Cabral v The City and County of Honolulu, 22 Haw. 872 (1933). There, the landowner maintained a culvert in a stream, causing the stream to flow at a right angle to its ordinary course. In repeated instances of heavy rainfall prior to 1930, it became apparent that the culvert was inadequate to handle the storm waters. In November 1930, the culvert overflowed after a heavy rainfall, causing a flood on plaintiff's property. The Hawaii Supreme court again held that the Act of God defense was not available because plaintiff was aware, or should have been aware, of the potential for flood given the prior problems with the culvert. Id. at 878.

   Cases from other jurisdictions seem to reach the same result when the Act of God defense is raised. In Matter of the Complaint of Cenac Towing Co., Inc., 2007 U.S. App. LEXIS 11705 (11th Cir. May 18, 2007), the defendant was sued when his barge broke free during Hurricane Ivan and damaged other boats. The court noted that the Act of Cod defense "applies only to events in nature so extraordinary that the history of climatic variations and other conditions in particular locality affords no reasonable warning to them." Id. at 932 (quoting Warrior & Gulf Navigation Co. v. United States, 864 F.2d 1550, 1553 (11th Cir. 1989)). The court held that the defendant was negligent in not property tying up his barge, thereby negating the Act of God defense.

   Hurricane Katrina was a catastrophic hurricane, creating unexpected results, making courts more receptive to reliance on the Act of God defense. In Duboue v. CBS Outdoor, Inc., 996 So. 2d 561 (La. Ct. App. 2008), plaintiff sued when defendant's sign blew off the roof, causing damage to plaintiff's building. An expert civil engineer testified that the sole cause of the damage to plaintiff's building was Hurricane Katrina, whose wind forces exceeded those contemplated by the building code requirements in existence when the sign was constructed fifty years prior to the hurricane. The court concluded that the damage was due to natural caauses without human intervention and no negligent behavior by the defendant had contributed to the accident. Id. at 563.

   And in Simmons v. Berglin, 2010 U.S. App. LEXIS 23499 (5th Cir. Nov. 12, 2010), the court determined that plaintiff made adequate efforts to tie down her boat prior to the approach of Hurricane Katrina, absolving her of responsibility for damage her boat caused to plaintiff's property. Given the strength of Hurricane Katrina and the widespread devastation it inflicted upon the docks and boats in the area, plaintiff's actions, even if negligent, had no effect on the boat's coming loose. Id., 2010 U.S. app. LEXIS 23499, at *17.

   Did the owners of the Keehi Boat Harbor have prior knowledge that a tsunami could cause damage to boats moored there, imposing a duty to strengthen the docks? It is arguable they did. Tsunamis are not an infrequent occurrence in Hawaii. Fortunately, a potentially large tsunami created by the February 2010 earthquake in Chile never materialized. Still, officials recognized that Hawaii "dodged a bullet. Even so, this "small" tsunami created waves of 5.5 feet at Hilo and 6.5 feet on Maui. Consequently, perhaps Keehi Marine Center should have known of the potential for damage to the boat harbor in the event of a tsunami and made preparations for such events.

Governor's Office Confirms Passage of HB 924 and Revised Definition of "Occurrence"

   Since late last week, we have heard rumors that HB 924 was signed by the Governor.  Before today, there was no confirmation of this on either the Legislature's or the Governor's websites. 

   As you recall, HB 924 states that "occurrence" in a liability policy "shall be construed in accordance with the law as it existed at the time that the insurance policy was issued."  The bill was originally drafted to more aggressively overturn the Hawaii Court of Appeal's decision in Group Builders v. Admiral Ins., 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010).  Under the initial bill, courts were instructed to "presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured."  The bill was originally designed to apply to existing policies, which created an uproar among the insurers.

   I called the Governor's office this morning to confirm the rumor.  The receptionist I spoke with viewed the Legislature's website, as I have done daily for the past week, to confirm HB 924 had not been signed by the Governor.  An hour later, however, the Governor's office called to inform me the Governor signed HB 924 "last week."  And since my conversations with the Governor's office this morning, the Legislature's website has been updated to reflect that the bill was signed last Friday, June 3, 2011.  

   Here is the bill.  Our prior posts on the bill are here and here.  It will be interesting to see how this bill impacts several construction defect lawsuits currently pending in state and federal courts.

Oral Argument Heard in Ahn and Kim Cases

   We previously posted here and here on decisions by the Hawaii Intermediate Court of Appeal in Ahn v. Liberty Mutual Fire Ins. Co. and Kim v. Liberty Mutual Fire Ins. Co.  As you recall, the issue in the two cases was whether the insured could seek administrative review when the insurer denied coverage or was the right to seek review limited to the medical provider. 

   My blogging colleague, Rebecca Copeland, attended last week the oral argument in the two cases before the Hawaii Supreme Court.  Rebecca's recent post [here] gives us a flavor of how the oral argument went.  We will now wait for the Supreme Court's decision.

Coverage Rejected Under Owned Property and Alienated Property Exclusions

  The insured's request for a defense when sued in a construction defect action was denied under the owned property exclusion and the alienated property exclusion in 1777 Lafayette Partners v. Golden Gate Ins. Co., 2011 U.S. Dist. LEXIS 48562 (N.D. Cal. April 29, 2011).

   In 1999, Lafayette Partners purchased an abandoned walnut processing factory to convert into living and working units. The property was developed into a rental property from 2000-2001, and thereafter rented. In May 2003, Lafayette Partners entered into a sales agreement with Wolff Enterprises LLC. The sale closed in February 2005.  Wolff then converted the rental units into condominiums.

   In December 2007, the Walnut Factory Owners Association sued Wolff for construction defects. In Lafayette Partners was added to the suit in 2009. The suit alleged a variety of defective conditions, including the roofs, exteriors, windows, electrical , plumbing, and mechanical components and systems.

   Lafayette Partners was a named insured on a policy that took effect on August 1, 2002, after construction was completed and the units were held for rent. In Lafayette Partners remained insured in renewals of the policy until August 1, 2005.

   The policy's owned property exclusion eliminated coverage for property damage to "property you own, rent or occupy." Under the alienated property exclusion, the policy barred coverage for property damage to "premises you sell, give away or abandon, if the 'property damage' arises out of any part of those premises." An exception stated the exclusion did not apply "if the premises are 'your work' and were never occupied, rented or held for rental by you."

   When Lafayette Partners tendered its defense in the underlying defect action, the insurer denied coverage. Lafayette Partners filed this coverage action. The district court agreed there was no coverage. First, the owned property exclusion precluded coverage before the project was sold. Further, even if the owned property exclusion did not apply after Lafayette Partners no longer owned the property, the alienated premises exclusion applied after the sale of the property. The exception to the alienated property exclusion did not apply because the property was held out for rental, and actually rented, by Lafayette Partners for three years prior to its sale.

   As a matter of law, there was no duty to defend Lafayette Partners.

 

 

 

 

 

 

Court Decides Which Documents Insurer Can Withhold From Discovery

   The insurers' resistance to discovery requests was before the court in Cummins, Inc. v. Ace Am. Ins. Co., et al., 2011 U.S.Dist. LEXIS 46984 (D. Ind. May 2, 2011).

   The factual background involved coverage Cummins sought for severe flood damage at its main corporate campus. The insurers had paid over $91 million on Cummins' claims. Discovery was pursued as the parties argued over additional coverage. The insurers withheld documents from production based on attorney-client privilege and work product. Other documents were withheld on relevancy grounds.

   The magistrate judge made a meticulous review of each of the grounds relied upon by the insurers to withhold documents. The insurers resisted producing documents generated by the outside counsel who were hired to provide counsel and advice, and who never provided an claims adjustment services. The court held that the insurers' privilege objections were well-founded as to many of the documents that were withheld. The privilege did not exist for other documents which the court ruled should be produced.

   Turning to documents withheld on work product grounds, the court noted that applying the work product doctrine in first-party insurance coverage disputes was challenging because it was difficult to separate documents that were prepared in the normal course of business from those prepared for purposes of litigation with its insured. The court adopted presumptions to determine the purposes of preparing particular documents. A document prepared before an insurer made a final decision on a claim and was part of the factual inquiry or evaluation of the claim was not work product because anticipation of litigation was presumed unreasonable before a final decision was reached on a claim. A document prepared after a claim was denied, however, was presumed to be work product. Under this test, the documents withheld by the insurer were not protected by work product and were ordered to be produced.

   Finally documents relating to the adjustment and payment of Cummins' claim were withheld on relevancy grounds. The insurers offered no arguments in support of their relevance theory. Therefore, the insurers were ordered to produce these documents, as well.