Insurance Law Hawaii

Coverage for Stolen Marijuana Plants Violates Public Policy

  An interesting case challenging the insurer's denial of coverage for stolen marijuana plants has been working its way through the Federal District Court in Hawaii. See Tracy v. USAA Cas. Ins. Co., Civil No. 11-00487 LEK-KSC (Order Granting Defendant's Motion for Summary Judgment, issued March 16, 2012).

   Plaintiff had twelve marijuana plants stolen from her property. Plaintiff alleged she lawfully possessed the plants consistent with Hawaii law, which permitted individuals to possess and grow marijuana for medical purposes.

   Plaintiff had a homeowner's policy with USAA. Loss of "tress, shrubs and other plants" was covered by the policy. Plaintiff notified USAA of the theft of her plants, claiming a loss of $45,600. USAA initially paid $8,801.90 for the loss, but then refused to make further payment because, it argued, plaintiff did not have an insurable interest in the plants.

   Plaintiff sued for breach of the policy and an unreasonable/bad faith denial of her claim. USAA moved for summary judgment, contending plaintiff lacked an insurable interest in the marijuana plants under State and Federal law.

   District Court Judge Leslie Koybayashi looked to Hawaii law in this diversity case. Hawaii enacted a medical-use-of-marijuana law in 2000. The law was passed as an affirmative defense to any prosecution involving marijuana. Hawaii law also provided an insurance policy was not enforceable except for the benefits of persons having an insurable interest in the property insured. Insurable interest meant any lawful interest in the safety or preservation of the property free from loss, destruction or pecuniary damage.

   Based upon this authority, Judge Kobayashi predicted that the Hawaii Supreme Court would hold that a qualifying patient who was in strict compliance with the medical marijuana laws had a lawful interest in her marijuana supply. Therefore, plaintiff had an insurable interest in her marijuana plants. The court further assumed that the "trees, shrubs and other plants" provision of the policy covered Plaintiff's loss.

   However, the court could not enforce the provision because Plaintiff's possession and cultivation of marijuana, even for state-authorized medical use, violated federal law, as noted in Gonzales v. Raich, 545 U.S. 1 (2005). Gonzales held that the federal Controlled Substances Act, 21 U.S.C. sec. 801 et seq., barred the medical use of marijuana and prevailed over any state law permitting such use.

   Consequently, requiring USAA to insure for the replacement of medical marijuana plants would be contrary to federal law and public policy. As a matter of law, USAA's refusal to pay for Plaintiff's claim did not breach the policy. Nor did the denial of the claim constitute the tort of unreasonableness/bad faith.

   Thanks to University of Hawaii, William S. Richardson School of Law, student Dave Yarber for sharing this decision. Dave has been carefully following the developments of this case.

 

Broker Not Liable for Failure to Reveal Insurer's Insolvency After Policy Issued

   Faced with an issue of first impression in California, the Court of Appeals held that a broker was not liable for failing to reveal the insurer's insolvency occurring after issuance of the policy. Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Serv. West, Inc., 2012 Cal. App. LEXIS 232 (Cal. Ct. App. Feb. 28, 2012).

   The developer for a construction project in downtown San Diego retained Aon as its broker to secure coverage. Aon procured a general liability policy for the project with Legion Indemnity Company. Legion was solvent when it issued the policy.

   The developer hired Pacific Rim ("PacRim") as one of several subcontractors on the project. The parties entered into a contract in which the developer agreed to provide PacRim with liability insurance through anOwner Controlled Insurance Program ("OCIP"). Aon was not a party to the contract and PacRim was never its client. PacRim, however, enrolled in the OCIP by contacting Aon and providing all necessary paperwork.

   During the construction project, an Illinois court entered an order of liquidation of Legion, finding it was insolvent. Aon informed the developer, but not PacRim. PacRim alleged that had it been informed of Legion's insolvency, it would have suspended work and insisted that the developer obtain alternative coverage for the project.

   After completion of the project, the homeowners association filed a complaint for construction defects against the developer and its subcontractors. The developer filed a cross-complaint against PacRim and the other subcontractors seeking indemnity. PacRim then filed a cross-complaint against the developer and Aon for declaratory relief, breach of contract, negligence and other claims. PacRim alleged Aon had breached its duty of care by negligently or intentionally failing to disclose Legion's insolvency. The trial court sustained Aon's demurrer and PacRim appealed.

   The Court of Appeal determined Aon did not have a duty to inform PacRim of Legion's post-issuance insolvency. PacRim was asking the court to create a new legal duty of notification of the insolvency after the policy was procured, and to apply the ruling retroactively against Aon. But Aon had no legal duty to provide notice of the discontinuation of coverage caused by legion's insolvency. PacRim did not allege that Aon failed to use reasonable care in procuring the policy. Instead, PacRim sought to impose upon brokers a new legal duty of notification after the policy was procured of the insolvency of an insurance company. That duty rested with the insurer.

 

 

Consequential Damages Available If Insurer Breaches Duty to Defend

   The California Court of Appeals held that a carrier who breaches the duty to defend may be liable for consequential damages above policy limits. Carlson v. Century Surety Co., 2012 U.S. Dist. LEXIS 23119 (N.D. Cal. Feb. 23, 2012).

   The underlying plaintiffs listed their home for sale with Prudential California Realty. Plaintiffs entered into a sales agreement for $1,262,000. When the sale fell through, the purchaser released the $1,000 deposit to plaintiffs. The plaintiffs, however, demanded $5,000. It became clear that Prudential never deposited the $1,000 in escrow.

   The plaintiffs sued Prudential, demanding over $65,000 in damages. Prudential tendered to its errors and omissions carrier, Century Surety Co., who denied coverage. The policy only provided coverage for a claim first made during the policy period if the insured had no basis to believe that any act or omission might reasonably be expected to be the basis of a claim. The policy period was from February 1, 2008 to February 1, 2009.

   Prudential's file contained a letter from plaintiffs dated August 20, 2007, before the policy period, demanding that Prudential attend a mediation prior to the suit being filed. Prudential claimed it never received the August 20, 2007 letter regarding mediation.

   Prudential agreed to allow a default judgment be entered for $3,334,834.61. Plaintiffs agreed to not execute on the judgment against Prudential in return for an assignment of rights under Prudential's policy with Century.

   Acting under the assignment, plaintiffs sued Century for failing to defend and for breach of the covenant of good faith and fair dealing. In a prior decision, the court ruled Century had breached its duty to defend, but found questions remained regarding whether the settlement agreement and default judgment were reasonable and free from fraud or collusion.

   Century now argued even though it incorrectly denied the claim, its action was not unreasonable. Century relied on the presumption that a letter correctly addressed and properly mailed was presumed to have been received in the ordinary course of mail. The court agreed that Century's denial of coverage was not unreasonable, so Century's motion for summary judgment on plaintiffs' allegations of breach of the implied covenant of good faith and fair dealing was granted.

   Century's motion for summary judgment on whether plaintiffs' damages could exceed the policy limits, however, was denied. A plaintiff could recover consequential damages and an excess judgment by proving breach of the express terms of a policy. A judgment in excess of the policy limits was a foreseeable outcome of the breach of the duty to defend.

   But to recover an agreed to default judgment against the insurer, the plaintiffs had to show the judgment was not unreasonable and was free from fraud or collusion. Here, theevidence showed that plaintiffs had colluded with Prudential. Both parties knew that the plaintiffs had first made their claim prior to the inception of the policy. Yet, the settlement agreement was conditioned on sworn declarations by Prudential and provided to plaintiffs stating that the insured was unaware of plaintiffs' claim prior the policy period.

   Because the settlement agreement was collusive, plaintiffs were not entitled to any recovery from Century.

Homeowner's Policy Does Not Cover Injuries from Parked Car's Carbon Monoxide

   The Connecticut Supreme Court determined that the insured's homeowner's policy did not cover liability for injury to her house guests caused by a car left running overnight in the attached garage. See New London County Mut. Ins. Co. v. Nantes, 2012 Conn. LEXIS 62 (Conn. Feb. 21, 2012).

   The insured had two house guests. One night she parked the car in the garage and closed the garage door, but neglected to turn of the engine. The car engine continued to run overnight, and the house filled with carbon monoxide. The house guests suffered serious neurological injuries from carbon monoxide poisoning. They suffered additional injuries when the insured dragged them, unconscious, out of the house.

   The insured submitted claims for the house guests' medical expenses to the insurer, but the claims were denied. The insurer relied upon the following exclusion in the homeowner's policy: "[c]overage for personal liability and medical payments to others does not apply to 'bodily injury' or 'property damage' arising out the ownership, maintenance, use, loading or unloading of motor vehicles . . . ."

   The insurer moved for a declaratory judgment on the policy's interpretation. The trial court granted summary judgment to the insurer. It concluded that all of the house guests' injuries, including the bodily injuries sustained while being dragged from the house, arose out of the use of the motor vehicle and were therefore excluded from coverage.

   The Conneticut Supreme Court affirmed. First, the court rejected the argument that leaving a car in one's garage did not constitute the use of a motor vehicle. The insured parked the car in the garage. Parking was plainly an employment of a car for some purpose of the user.

   The insured also argued that the doctrine of concurrent causes brought the injuries within the scope of coverage. Under the doctrine of concurrent causes, coverage was extended to a loss caused by the insured risk even though an excluded risk was a contributory cause. Here, whether the closing of the garage door, an arguably covered event, was a contributing cause of the house guests' injuries, was irrelevant. The fact that the insured's use of her motor vehicle was connected to a condition that caused injury to the house guests was enough to bring them within the motor vehicle exclusion.

   Finally, the court held that the bodily injuries, caused by being dragged out of the house, were also excluded. Because the insured's negligent act of leaving her car running in the garage was the proximate cause of the injuries sustained by being dragged from the house, it followed that those injuries arose out of the use of her car. Consequently, they were connected to use of the vehicle and excluded from coverage.

The Status of Construction Defect Coverage Litigation in Hawaii

   Here is an article I authored in this month's Hawaii Bar Journal entitled, "The Battle Over Coverage For Construction Defects." The premise of the article is that while the Intermediate Court of Appeals held in Group Builders, Inc. v. Admiral Ins.Co.,123 Haw. 142, 213 P.3d 67 (Haw. Ct. App. 2010) that construction defects do not arise from an occurrence and are therefore not covered under a liability policy, the Hawaii Supreme Court has yet to weigh in on the issue. Prior cases issued by the Supreme Court, however, suggest it will ultimately determine that construction defects caused by faulty workmanship are, in fact, covered, unless the defect arises from an intentional act.

Confirmation of Appraisal Award Improper

   Whether an appraisal award could be confirmed as an arbitration award considered by the Florida Court of Appeal in State Farm Florida Ins. Co. v. Gonzalez, 76 So. 3d 34 (Fla. Ct. App. 2011).

   The insureds' home was damaged by a hurricane in 2005. State Farm acknowledged there was a covered loss, but an appraisal was needed because the parties disagreed on the amount of loss. In 2008, the insured's appraisal award was granted for loss in the amount of $29,763 for ordinance and law coverage and $84,090 for dwelling coverage. The appraisal award stated it was subject to the terms and conditions of the policy. State Farm paid the dwelling amount, but did not pay the ordinance and law portion because the policy required that this portion only be paid when the dwelling was actually repaired.

   The insureds filed a Petition to Confirm Appraisal Award, alleging that State Farm failed to pay the ordinance and law portion and that all conditions precedent had been met. The insureds requested that the trial court confirm the appraisal award and enter a final judgment awarding them the ordinance and law amount.

   The trial court granted the Petition to Confirm, but failed to articulate the reason. On appeal, State Farm contended that the trial court erred by entering the Final Judgment Pursuant to Appraisal Award.

   The Court of Appeal noted that the insureds were arguing that State Farm breached the policy by not paying the ordinance and law portion of the appraisal award. Instead of filing a complaint, however, they filed the Petition to Confirm. There was no statute allowing for the filing of a Petition to Confirm an appraisal award. The trial court erroneously rejected State Farm's argument that a Petition to Confirm was not authorized and that the arbitration statutes were not applicable to appraisal awards.

   Accordingly, the appellate court reversed, but remanded with instructions to allow the insureds to file a complaint alleging a viable cause of action against State Farm. The trial court was required to adjudicate State Farm's coverage defense as to the ordinance and law coverage.

Landlord Only Entitled to Defense for Liability Arising Out of Leased Property

   Although it was an additional insured under the tenant's commercial general liability policy, the landlord was not entitled to a defense for injury arising out of property other than the leased property. See VBH Luxury, Inc. v. 940 Madison Assoc. LLC, 2012 N.Y. LEXIS 217 (N.Y. Feb. 14, 2012).

   The landlord was an additional insured "only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to tenant." Therefore, the landlord would be entitled to a defense in an action against it by a third party for an injury suffered on the leased premises.

   The policy, however, did not provide coverage for liability to the landlord for damage to property owned, rented, or occupied by the tenant. Therefore, the insurer was not obligated to defend the landlord in the underlying action.

Coverage Issues Abated During Appraisal

   The court agreed with the insurer that the litigation should be abated during the appraisal for damage caused by Hurricane Ike. See United Neurology, P.A. v. Hartford Lloyd's Ins. Co., 2012 U.S. Dist. LEXIS 15675 (Feb. 8, 2012).

   Harford invoked the appraisal process, which was required under the policy if the parties failed to agree on the amount of loss. Hartford argued if it satisfied any appraisal award to the insured, the insured's breach of contract and bad faith claims would be subject to dismissal. Therefore, the court was asked to abate the suit until the appraisal process was completed.

   The insured did not oppose the appraisal, but argued the abatement was improper during appraisal. The insured urged the court to allow discovery to proceed so that once the appraisal award was made, the case would be ready to be tried. The insured also argued that because the dispute involved both coverage and valuation disputes, the court should stay the valuation issue and proceed with the coverage issue. Hartford's adjuster found some damage to the insured's building that was not attributable to Hurricane Ike,. Therefore, the insured submitted, abatement of the causation and coverage issue should be denied.

   Hartford argued the court had discretion whether to abate the case during the appraisal process. Further, the appraisal condition, once invoked, was a condition precedent to liability. The policy stated no suit could be brought against the insurer unless the policy provisions had been complied with.

   The court agreed with Hartford. Abatement of the entire suit was appropriate while the appraisal process went forward. Hartford's motion to compel appraisal and abate the remaining proceeding was granted.