Insurance Law Hawaii

Claims for Breach of Contract, Breach of Implied Covenant of Good Faith And Fair Dealing Can Be Based on Same Conduct

   The insured's claim for breach of the implied covenant of good faith and fair dealing was dismissed by the trial court because it was based on the same conduct as the breach of contract claim. See Columbia Cas. Co. v. 3M Co., 2012 Minn. App. LEXIS 23 (Minn. Ct. App. March 26, 2012).

   The insurer filed a declaratory judgment action against 3M Company regarding coverage for certain claims against 3M. 3M counterclaimed, alleging breach of contract and breach of the implied covenant of good faith and fair dealing. 3M alleged that the insurer breached the terms of the polices by refusing to reimburse or indemnify 3M for the costs of defending or resolving certain products-liability claims. 3M also alleged that the insurer breached the implied covenant of good faith and fair dealing by engaging in subterfuges and evasions.

   The trial court dismissed 3M's claim for breach of the implied covenant of good faith and fair dealing. The dismissal was primarily based on the district court's conclusion that 3M could not simultaneously maintain its claims for breach of contract and breach of the implied covenant of good faith and fair dealing because the claims  were based on the same conduct. A judgment was entered and 3M appealed.

   On appeal, 3M argued it sought contractual damages on alternative theories: (1) breach of the express terms of the insurance policies; and (2) breach of the implied covenant of good faith and fair dealing that was read into most contracts.

   The court of appeals agreed that Minnesota precedent did not preclude 3M form pleading both theories. Therefore, 3M's claims for breach of the implied covenant of good faith and fair dealing were permissible even if they were based on the same conduct as 3M's claims for breach of the express terms of the insurance policies.

Ensuing Losses From Faulty Workmanship Must be Covered

   Coverage for damages resulting from faulty workmanship in the construction of an apartment complex was at issue in The Bartram, LLC v. Landmark Am. Ins. Co., 2012 U.S. Dist. LEXIS 44535 (N.D. Fla. March 30, 2012).

   The owner of the apartments, Bartram, had primary coverage and three layers of excess coverage. Each contract excluded loss from faulty workmanship. The policies provided, however, "if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage."

   Bartram contended water intrusion occurred because of faulty workmanship, which caused damage to the buildings' exterior and interior finishes, wood sheathing, framing, balcony systems, drywall ceilings and stucco walls. This damage was separate from the work needed to simply fix the faulty workmanship. Therefore, Bartram argued, the ensuing losses that resulted from the water intrusion was covered.

   The insurer argued the ensuing loss exception was not applicable if the ensuing loss was directly related to the original excluded loss. Since the faulty workmanship naturally and foreseeably led to water intrusion without any new, independent cause, there was no ensuing loss. Therefore, coverage was barred by the faulty workmanship exclusion. The insurer cited cases finding no coverage for water damage resulting from faulty workmanship where the ensuing loss provision provided the faulty workmanship "exclusion does not apply to ensuing loss or damage caused by or resulting from a peril not otherwise excluded."

   The policy exclusions here did not require reading a proximate cause element into the policy. Instead, if ensuing losses resulted from a covered cause, they were covered under the policy regardless of whether the loss was naturally set in motion by an excluded cause or loss. Therefore, if the faulty workmanship resulted in water intrusion that subsequently resulted in ensuing losses, the cost to repair the faulty workmanship was excluded, but the ensuing losses from the water intrusion were covered.

Ensuing Loss Provision Found Ambiguous

   After the insurer denied coverage in a homeowner's policy for construction defects under various exclusions, the court found the ensuing loss provision was ambiguous. Kesling v. Am. Family Mut. Ins. Co., 2012 U.S. Dist. LEXIS 38857 (D. Colo. March 22, 2012).

   After purchasing a home from the sellers, the insureds noticed problems with the deck of the home. Massive cracking appeared, causing lifting and leaking on the deck and water running through the exterior foundation wall into the home. There was also damage to the roof and crawlspace.

   The insureds had a homeowner's policy with American Family, which covered accidental direct physical loss to property described in the policy unless the loss was excluded. They requested coverage for "conditions, defects and damages." American Family denied coverage because wear and tear, as well as damage to foundations, floors and roofs were excluded. The policy did provide coverage, however, for "any resulting loss to property described . . . above, not excluded or excepted in this policy.

   When coverage was denied, the insureds sued American Family. On American Family's motion for summary judgment, the court agreed that the damages claimed fell within the policy's exclusion for loss caused by faulty, inadequate or defective construction or design. But the question remained as to what, if anything, was removed from the exclusion by the resulting loss provision?

   The exception was broadly worded. "Any resulting loss" could be interpreted to mean just that - any loss, other than the repair or replacement of the defective construction, that resulted from that defective construction. This would mean damage to parts of the home other than the defective construction that resulted from water or moisture infiltration resulting from the defective construction would be covered. On the other hand, "any resulting damage" could be limited to damage that was separate and independent from that which was directly caused by the defective construction.

   Because there were two reasonable interpretations of the resulting loss provision, the court found there was an ambiguity to be construed against the insurer.

   This was not the end of the analysis, however. The "any resulting damage" exception was itself subject to the proviso that no other exclusion or exception applied. Only damage to parts of the house other than the deck, the roof and the crawlspace resulting from water or moisture infiltration caused by defective construction would amount to "resulting damage" within the meaning of the exception to the exclusion. There were still genuine issues of material fact concerning the existence of such damage or whether any such damage fell within another exclusion or exception in the policy. Therefore, American Family's motion for summary judgment was denied.

Insurer's Motion to Deny Claim Based on Judicial Estoppel Fails

   The insurer's attempt to reject a claim due to inconsistent positions taken by the insured in two different matters failed in Rice v. Certain Underwriters at Lloyds, 2012, U.S. Dist. LEXIS 36445 (S.D. Tex. March 19, 2012).

   The insured's home was damaged in 2008 during Hurricane Ike. The insured submitted a claim to Lloyds, but no decision was made on coverage.  In 2010, the insured filed for Chapter 13 bankruptcy. On Schedule B, the insured was asked to list his interests in insurance policies and other unliquidated claims. The insured failed to mention any claim against Lloyds.

   On September 12, 2010, the insured sued Lloyds for breach of contract and breach of the duty to good faith and fair dealing. In March 2011, the insured filed an amended Schedule B in the Bankruptcy proceeding, adding his claim against Lloyds for damage to his home caused by Hurricane Ike.

   Lloyds then filed a motion for summary judgment, arguing that the insured's previous failure to disclose his claims against Lloyds was a legal position inconsistent with his current action against Lloyds. Therefore, Lloyds argued, the insured was judicially estopped from pursuing his suit.

   The court noted that judicial estoppel was applied where an intentional self-contradiction was used as a means to obtain unfair advantage. Although the insured failed to disclose his potential claims against Lloyds at the time he filed for bankruptcy, he subsequently filed an amended schedule disclosing his pending claims. Further, the insured filed his amended schedule in the Bankruptcy Court before Lloyds filed its motion for summary judgment. Accordingly, judicial estoppel did not apply and Lloyds' motion was denied.

No Coverage for Property Damage That is Limited to Work Completed By Subcontractor

   The issue before the 11th Circuit was whether, under Florida law, a general contractor had coverage for a property damage claim limited to the defective work performed by a subcontractor, and not affecting any other portion of the project. The court found no coverage in Amerisure Mut. Ins. Co. v. Auchter Co., 2012 U.S. App. LEXIS 5412 (11th Cir. March 15, 2012).

   Amelia Island Company contracted with Auchter Company, a general contractor, for construction of an inn and conference room. Auchter subcontracted with Register Contracting Company to install the Inn's roof. Pursuant to the Florida Building Code, installation of the roof required that it be able to withstand 110 m.p.h. winds.

   Register completed installing the roof tiles in January 1998. Beginning in 2002, the tiles began dislodging from the roof. During the 2004 hurricane season, three hurricanes caused more tiles to come off the roof. Some of these tiles hit other tiles, cracking them.

   In 2006, the parties went to arbitration over the costs of repairs for the roof. Amellia alleged that Auchter breached its contract to perform in a workmanlike manner. Amelia did not allege that the falling roof tiles damaged any other property or part of the project. The entire roof had to be replaced because each tile had to be inspected to determine whether it was properly fastened. The arbitrator found Auchter liable for $2.1 million for the defective installation of the roof.

   Auchter had a CGL liability policy with Amerisure. Amerisure defended Auchter in the arbitration under a reservation of rights. Amerisure filed a declaratory judgment action against both Auchter and Amelia in federal court seeking a determination that Amelia's claim was not for "property damage." Amerisure argued that Amelia's claim was for recovery of the roof it had paid for but had not received, and any damage was limited to the roof itself. Amelia argued that the plain meaning of "property damage" under the CGL policy did not require that "other" property be damaged to trigger coverage. The district court agreed with Amerisure, granting its motion for summary judgment.

   The Eleventh Circuit surveyed Florida law, primarily two cases: United States Fire Ins. Co. v. J.S.U.B., Inc. 979 So.2d 871 (Fla. 2007) and Auto-Owners Ins. Co. v. Pozzi Window Co., 984 So. 2d 1241 (Fla. 2008). J.S.U.B.noted that claims solely for the costs of repairing and replacing the actual defects in construction were not covered under CGL policies. In Pozzi, the court held that defective installation of a window did not constitute property damage unless the defective component resulted in physical injury to some other tangible property.

   Here, Amelia's claims for the Inn's defective roof was not a claim for "property damage." Register's defective installation of the Inn's roof did not cause"physical injury to tangible property" as required to trigger coverage under the CGL policy. The only damages Amelia alleged were those to correct the faulty roof supplied by Auchter's subcontractor. Amelia's claim was simply a claim for the cost of repairing the subcontractor's defective work. Consequently, there was no allegation of "property damage."

 

Pollution Exclusion Precludes Coverage For City's Alleged Contamination of Drinking Water

   In an entertaining decision authored by Judge Posner, the Seventh Circuit affirmed the district court's denial of coverage based upon the pollution exclusion. Scottsdale Indem. Co. v. Village of Crestwood, 2012 U.S. App. LEXIS 5069 (7th Cir. March 12, 2012).

   In 1985, Crestwood's mayor and other Village officials learned from state environmental authorities that one of the wells was contaminated by perc. Perc is a solvent widely used in dry cleaning and a carcinogen. Perc used by a nearby dry-cleaning establishment leaked into the groundwater tapped by the well. Although the Village officials promised the state they would close the well, use of the well continued until 2007 without disclosure to the Village residents.

   Hundreds of Crestwood residents sued the Village and Village officials. Defendants turned to their insurers, who denied coverage based upon the pollution exclusion. The exclusion barred coverage for damages arising out of "actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time."

   The insurers sued for a declaration that there was no coverage under their policies. The district court, relying upon the pollution exclusion, granted summary judgment to the insurers.

   The Seventh Circuit affirmed. The court agreed that a literal reading of the pollution exclusion would exclude coverage for acts not commonly understood to arise from pollution. For example, suppose a tanker truck filled with perc spilled its liquid cargo, another vehicle skidded on the wet surface of the highway and collided into an abutment, injuring the driver. Perc would be a contaminant under the pollution exclusion and the cause of the injuries. No one would argue, however, that a claim arising from such an accident would be barred by the pollution exclusion. But this was not such a case.

   Here, the Village caused the contamination of its water supply by not sealing the well, even though it did not introduce the contamination into the soil or groundwater. The pollution exclusion would mean little if the insured were required to be the original creator of the pollution in order to be within the exclusion.

   What mattered in a coverage suit was that the underlying suit was premised on a claim that the perc caused injuries for which plaintiffs were seeking damages, and that claim triggered the pollution exclusion.

Allegations of Ensuing Loss Insufficient to Survive Motion to Dismiss

   The court considered whether damages to the plaintiffs' home caused by Chinese drywall were covered under their homeowners policy. Dupuy v. USAA Cas. Ins. Co., 2012 U.S. Dist. LEXIS 31890 (M.D. La. March 9, 2012).

   The plaintiffs' complaint alleged that the Chinese drywall "emits odorous gases that cause damage to air-conditioner and refrigerator coils, copper tubing, electrical wiring, computer wiring, and other household items." Plaintiffs claimed damage to insulation, trimwork, floors, cabinets, carpet, and other items.

   The court first determined that the direct, phyiscal loss fell within the policy's "property damage" definition. The inherent qualities of the Chinese drywall required removal and replacement due to a direct, physical loss.

   The court next considered exclusions in the policy. Loss due to faulty, negligent, inadequate or defective materials were excluded. However, the policy covered "any loss that ensues from the such [damage], that is not otherwise excluded or excepted . . . ." The plain text of this exclusion meant the drywall itself was not covered.

   Further, the corrosion exclusion barred covering "loss . . . caused by or consisting of . . . smog, rust, or other corrosion, mold, wet or dry rot . . . ." Plaintiffs simplistically pled that the damage was not caused by corrosion, but by the drywall itself. Plaintiffs failed to explain how the noxious gasses from the Chinese drywall caused damage to the coils, wiring, and other metallic items. Instead, they hoped the ambiguous allegations would be resolved in their favor. This effort failed and did not get plaintiffs around the corrosion exclusion.

   While the policy could conceivably provide coverage under the ensuing loss provision, plaintiffs avoided certain factual allegations they were required to make under Twombly and Iqbal. To pursue claims under the ensuing loss provision, plaintiffs had to plead facts instead of conclusory allegations. At the very least, plaintiffs had to allege how the drywall caused damage to the trimwork, carpet, etc., not simply that it did so.

   Accordingly, USAA's motion to dismiss was granted.

No "Occurrence" Where Specific Breach of Construction Contract Claims

   Coverage for construction defects was denied because the underlying claims were strictly contract-based and did not arise from an occurrence. Secura Ins. v. Horizon Plumbing, Inc., 2012 U.S. App. LEXIS 4477 (8th Cir. March 5, 2012).

   Weitz Company, LLC was the general contractor on a project for MH Metropolitan, LLC. Horizon Plumbing, Inc. was a subcontractor. Horizon was required to include Weitz an additional insured on its liability policies.

   Metropolitan eventually fired Weitz, but Horizon continued with plumbing work on the project.

   Weitz sued Metropolitan for breach of contract. Metropolitan counterclaimed for breach of contract, alleging Weitz failed to timely complete the project, provide progress reports, supervise, coordinate, and pay timely the subcontractors, maintain adequate accounting records, and correct deficient and defective work.

   Weitz filed a third party complaint against Horizon for defective plumbing on the project, and to seek indemnity and contribution. Horizon's insurers defended and settled all claims against Horizon. The insurer also reimbursed Weitz for its defense of claims pursued by Metropolitan based upon Horizon's defective work. Weitz then contended that since it was an "additional insured" on Horizon's policies, the insurers should also pay $1.1 million for attorney fees and costs in incurred in defending against Metropolitan's entire counterclaim.

   The insurer filed for a declaratory judgment. The district court ordered judgment in the insurers favor, ruling that there was no duty to defend Weitz because its claim was not based on an "occurrence" triggering coverage under the insurance policies.

     Weitz contended Horizon's alleged failure to connect the drain pipes was an "occurrence" under the policy. The Eighth Circuit disagreed. Metropolitan's only counterclaim against Weitz was for breach of contract. The alleged breach of specific contractual provisions, including the failure to perform repair work required by the contract, was not an occurrence. There was no allegation of an accident or that Weitz's conduct had caused property damage.

Hawaii Supreme Court Reaffirms Insurer's Duty to Defend

   Although it did not break new ground, the Hawaii Supreme Court reaffirmed its strong commitment to the insurer's duty to defend in Hart v. Ticor Title Ins. Co., 2012 Haw. LEXIS 83 (Haw. March 27, 2012).

   The Harts owned two lots in Ewa Beach. They purchased a title insurance policy from TICOR which provided, in part, that TICOR would insure title against loss incurred by any defect in or lien or encumbrance on the title. The policy also agreed to pay in the defense of the title.

   In 2005, the Harts filed a Land Court petition to consolidate their two lots into one parcel. The State filed an answer, asserting, among other things, it reserved any interests in the property that may have escheated to the State, and asked the court to so rule.

   In response, the Harts tendered their defense against all the State's claims to TICOR, who refused to defend. TICOR argued that the State merely reserved its right to make that claim at some point in the future. In fact, the State responded to the Harts' motion for summary judgment be stating it was not pursuing any claim of escheat to the State. The Land Court granted, in part, the Harts' motion for summary judgment, determining that there was no basis for the State's claims for escheat.

   The Harts then sued TICOR in state district court for breach of contract and bad faith for its refusal to defend. The court denied the Harts' motion for summary judgment, finding that the State's escheat defense was a routine reservation of a possible defense and did not trigger coverage. The Intermediate Court of Appeals affirmed.

   The Supreme Court reversed, determining the ICA erred in concluding that TICOR did not have a duty to defend the Harts against the State's escheat claim.

   TICOR's argument that the State did not assert a "claim" within the meaning of the policy was unpersuasive. The State asserted that it had an interest in the property, including its reserving any interests in the property that may have escheated to the State. Therefore, the States' pleadings obligated TICOR to defend at the time the State asserted its escheat claim. Once the possibility of coverage triggered the duty to defend, TICOR had the duty to defend, regardless of whether the allegations were "groundless, false or fraudulent." The fact that the State ultimately clarified that it was not pursuing any claim of escheat did not excuse TICOR from its initial duty to defend.

   My Damon Key blogging colleague, Rebecca Copeland, gives her view of the case from the appellate advocate's perspective in her post [here] at www.recordonappeal.com.