Insurance Law Hawaii

Meaning of "Sudden" in Pollution Exclusion Found Ambiguous

   The New Mexico Supreme Court considered whether the word "sudden" found in the pollution exclusion of a liability policy was ambiguous. See United Nuclear Corp. v. Allstate Ins. Co., No. 32,939 (N.M. Aug. 23, 2012).

   United Nuclear operated several uranium mines in New Mexico from the 1960s through the early 1980s. At Church Rock Mine, a dam breached. 94 million gallons of radioactive liquid escaped from the tailings pond and poured into nearby Rio Puerco. The spill was described as the largest accidental release of radioactive material in U.S. history.

   United Nuclear was insured by a number of carriers. Policies issued by Allstate and in effect between August 1, 1977 and June 1, 1981, were at issue in this appeal. When sued, United Nuclear tendered to Allstate. Coverage was denied and United Nuclear filed a third-party complaint in the underlying suit, seeking a declaration that Allstate was required to defend and indemnify United Nuclear.

   Allstate moved for summary judgment based upon the pollution exclusion which removed from coverage all claims for damages caused by pollution or contamination unless the discharges were "sudden and accidental." The trial court granted the motion, which was upheld by the Court of Appeals.

   The Supreme Court first looked at dictionary definitions of the word "sudden." Dictionaries defined "sudden" as either synonymous with "unexpected," or as the temporal descriptor of a brief occurrence, or both. Other courts had found definitions of "sudden" to be so distinct as to render the term ambiguous.

   The New Mexico Supreme Court further noticed that courts across the country were evenly divided on the meaning of the term "sudden," with nearly half concluding the term is ambiguous.

   Therefore, in the absence of a definition of the term in the policies, finding diverging definitions in standard dictionaries and the lack of an consensus among courts nationwide, the court determined that the meaning of the term "sudden" as used in the policies was ambiguous. The case was remanded to allow United Nuclear to prove that its operations led to discharges that were in fact "sudden and accidental."

Exception to Exclusion for Water Damage Found Ambiguous

   The insured homeowners were successful in establishing coverage for water damage after demonstrating an exception to the exclusion relied upon by the insurer was ambiguous. Plantek v. Town of Hamburg, 948 N.Y.S. 2d 797 (N.Y. App. Div. 2012).

   The insureds' basement was flooded after an abutting water main ruptured. Allstate denied coverage under exclusion "4," which stated Allstate did not cover losses caused by "[w]ater . . . on or below the surface of the ground, regardless of its source . . . including water . . . which exerts pressure on, or flows, seeps or leaks through any part of the residence premises." 

   The insureds sued and moved for summary judgment. They argued there was an exception to the exclusion because damage caused by a sudden and accidental explosion "resulting from . . . Exclusion . . . 4" was covered. The claimed loss was caused by an explosion of the water main. The lower court granted the insureds' motion.

   On appeal, Allstate argued exception was an "ensuing loss" provision. Therefore, any initial loss to the insured's property caused by "water. . . on or below the surface of the ground" was not covered, but if there was an "explosion . . . resulting from" the initial loss, any secondary or ensuing loss caused by the explosion was covered. The homeowners contended the exception applied because there was an "explosion [of the water main] resulting from" the conditions set forth in exclusion 4, i.e., "[w]ater . . . below the surface of the ground" and causing "sudden accidental direct physical loss" to their property.

   The appellate court found both interpretations reasonable. Therefore, the exception to the exclusion was ambiguous and was to be construed in favor of the insureds. Coverage was established as the insurer failed to raise a fact issue in opposition.

Insurer Has Duty to Disclose Insured's Interest In Obtaining Written Explanation of Arbitration Award

   The issue faced by the Minnesota Supreme Court was whether the insurer had a duty to disclose the insured's interest in obtaining a written explanation of an arbitration award that identified the claims of recovery and the portions of the award attributable to each. Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 2012 LEXIS Minn. 404 (Minn. Sup. Ct., Aug. 22, 2012).

      Remodeling Dimensions, Inc. ("RDI") built an addition for the homeowners and installed windows in the original part of the house. After construction began, the homeowners also asked RDI to fix the master bedroom window in the original part of the house.

   After completion of the project, the house sustained storm damage. A consultant found significant moisture damage in several areas. The homeowners blamed RDI and commenced arbitration, claiming that defects in RDI's work caused water damage to the house.

   RDI tendered to its insurer, Integrity. Defense counsel was appointed to represent RDI in the arbitration. A reservation of rights letter was also sent, stating Integrity questioned whether the homeowners' claims were covered and reserving the right to deny coverage.

   The arbitrator awarded the homeowners $45,000 for basic house repairs, $2,000 for flat roof repair, $1,000 for final cleaning and $3,000 for construction  management fees. RDI's attorney then requested further written explanation of the award, which was denied as untimely.

   Integrity denied coverage of the award. RDI paid the homeowners and then sued Integrity for a declaratory judgment.

   RDI conceded the $2,000 for flat roof repair was not covered, but alleged breach of contract for Integrity's refusal to pay the rest of the arbitration award. The trial court granted RDI's motion for summary judgment, concluding that the vague arbitration award made it impossible to determine whether the insurance policy covered any of the homeowners' successful claims. The vagueness of the award was directly attributable to the attorney's failure to request a written explanation of the award. The court of appeals reversed. The attorney hired by Integrity did not have an attorney-client relationship with Integrity, and Integrity was not responsible for the attorney's failure to make a timely request for a written explanation of the award. Further, the homeowners' claims against RDI were not covered.

   The Supreme Court reversed the court of appeals and remanded.  First, the court considered the impact of exclusion "m", which excluded coverage for property damage to "your work" arising out of the work or any part of it. This provision excluded work performed by RDI on portions of the original house, but did not apply to adjacent walls and structures that had moisture damage caused by the work performed by RDI. So the homeowners' negligent-construction claim for moisture damage caused by RDI to the preexisting wall sand structure of the original home - located adjacent to work performed by RDI - would, if proven, be a covered claim under Integrity's policy.

   Next, the court considered whether Integrity was directly responsible for the vague arbitration award, making it obligated to indemnify RDI. The Supreme Court held that when an insurer notifies its insured that it accepts the defense of an arbitration claim under a reservation of rights that includes covered and noncovered claims, the insurer must disclose the insured's interest in obtaining a written explanation of the award that identifies the claims or theories of recovery actually proved and portions of the award attributable to each.

    

Federal District Court Predicts Florida Will Adopt Injury In Fact Trigger

   The U. S. District Court for the Middle District of Florida was confronted with determining whether Florida would follow the manifestation or injury in fact trigger in Axis Surplus Ins. Co. v. Contravest Constr. Co., 2012 U.S. Dist. LEXIS 104502 (D. Fla. June 5, 2012).

   The homeowner's association sued the insureds for alleged negligent construction and development of individual dwelling units and common areas of their condominium. Due to this negligence, severe damage was caused by water intrusion. The Association's members only became aware of the defects through the retention of construction experts.

   The insured had CGL coverage with Axis, with policies issued from 2003 to 2007. Coverage was denied for the periods 2003-2004 and 2004-2005. Axis provided a defense under the policies issued for 2005-2006 and 2006-2007, but under a reservation of rights. Axis sought a declaration that it had no duty to defend or indemnify because the damage manifested before its policy periods.

   For coverage to exist, "property damage" must have "occurred" during Axis' policy period. Axis argued damage occurred when it was discovered. The underlying complaint alleged that damage was not discovered until 2008, after the Axis policy periods. The insured agreed damage occurred when it was discoverable but, based upon the allegations of the underlying complaint, the damages may have been discoverable during the Axis policy periods. The Court noted that each of these approaches were variations of the "manifestation" trigger theory. The Association argued that the proper theory under Florida law was the "injury in fact" theory, under which damage "occurs" at the moment that there is actual damage, making the date of discovery irrelevant.

   The Florida Supreme Court had not yet decided which trigger was applicable. The federal district court believed the Florida court would adopt the "injury in fact" trigger. The underlying complaint suggested that the damage occurred at some point after the buildings were completed but before the experts inspected the property. This time period included the time that Axis's policies were in effect. Therefore, Axis had a duty to defend.

 

Judge Kobayashi Determines No Coverage for Construction Defect Claim

   Judge Kobayashi of the U.S. District Court, District of Hawaii, largely followed earlier precedent established by Judge Mollway in finding no coverage for construction defect claims. See Evanston v. Nagano, 2012 WL 3800320 (D. Hawaii Aug. 31, 2012).

   Evanston issued several liability policies to the insured contractor from 2002 and 2011. The insured entered a contract to build a residence in Honolulu. The homeowners were not happy with their home after the work was completed. They filed suit, alleging that the project was delayed and the construction was "riddled with defects." The complaint included claims for breach of contract and breach of warranties. Negligence was not alleged. Evanston defended, but under a reservation of rights. 

   Evanstonfiled suit for a declaratory judgment and moved for summary judgment. It argued that the underlying complaint alleged numerous breaches of the contract and numerous defects in the construction of the home, but did not allege negligence. Evanston noted that all of the underlying claims arose from the insured's intentional conduct.

   The insured argued that Act 83 meant the court must look to Hawaii case law at the time the policies were issued. The Act stated, in part, "the meaning of the term 'occurrence' shall be construed in accordance with the law as it existed at the time that the insurance policy was issued." The insured further argued that Hawaii case law at the time the policy was issued favored coverage.

   The court agreed with Evanston. The operative case law when the policies were issued were those relied upon by the Ninth Circuit in Burlington Ins. Co. v. Oceanic Design & Constr. Inc., 383 F.3d940, 946 (9th Cir. 2004) and Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 148-49, 321 P3d 67, 73-74 (Haw. Ct. Appeal 2010). These cases led Burlington and Group Builders to conclude that construction defects did not arise from an occurrence, but from a breach of contract, meaning there was no coverage.

   The insured urged the court to consider Hawaii case law indicating construction defects are covered under a liability policy, including Sentinel Ins. Co. v. First Ins. Co., 76 Haw 277, 875 P.2d 894 (1994); Hurtig v. Terminix Wood Treating & Contracting Co., 67 Haw. 480, 692 P.2d 1153 (1984); and Sturla, Inc. v. Firemans' Fund Ins. Co., 67 Haw. 203, 684 P.2d 960 (1984). In Ill. Nat'l Ins. Co. v. Nordic PCL Constr., Inc., 2012 WL 1492399 (D. Haw. April 26, 2012), Judge Mollway felt she was constrained to follow the Ninth Circuit's decision in Burlington. Judge Mollway also believed that both Burlington and Group Builders must have taken the cases cited by the insured into account. Accordingly, Judge Kobayashi felt that Group Builders and Burlingtonwere accurate descriptions of the law as it existed in Hawaii in 2002, when the first policy was issued by Evanston in 2002.

   Here, all the claims in the underlyng action or claims that arise from the construction contract. Such claims were not occurrences under Hawaii law, meaning there was no coverage under the policies.

 

 

 

 

Failure to Provide Timely Notice of Claim Releases Excess Carrier

   Receipt of notice of a claim to the excess carrier after the jury awarded damages was insufficient to enforce coverage. See Berkley Reg'l Ins. Co. v. Philadelphia Indem. Ins. Co., 2012 U.S. App. LEXIS 15998 (5th Cir. Aug. 2, 2012).

   The underlying case involved a slip-and-fall by a dentist on the premises of Towers of Town Lake Condominiums. Towers had a primary policy with Nautilus with a policy limit of $1 million per occurrence. It also had excess coverage through Philadelphia Indemnity Insurance Company with a policy limit of $20 million in excess of the primary coverage.

   Injuries to the dentist were substantial. She could no longer continue practicing as a dentist. She sued Towers, and Nautilus defended. Expert reports put her damages at $800,000 to $1.25 million. Negotiation attempts failed and the case went to trial. The jury awarded $1.6 million. The day of the verdict, Towers demanded that Philadelphia pay the amount in excess of the primary coverage. Philadelphia contended this was the first time it had notice of the claim.

   Nautilus unsuccessfully appealed on behalf of Towers. When the appeal was exhausted, suit was filed against Philadelphia. The district court held Philadelphia was not prejudiced by the lack of notice prior to the adverse jury verdict.

   The Fifth Circuit reversed. Notice requirements afforded valuable rights. The lack of notice, however, had to prejudice the insurer. Here, Philadelphia was not just notified late, it was noticed after all material aspects of the trial process had concluded and an adverse jury verdict was entered. It lost the ability to do any investigation or conduct its own analysis, as well as the ability to "join in" Nautilus's evaluation of the case. Finally, Philadelphia lost a right to sit at the mediation table.

No Coverage for Counterclaim Alleging Construction Defects Pled as Breach of Contract

   The Colorado Court of Appeals considered whether counterclaims against the insured for alleged faulty construction work were based in contract or constituted allegations of an "accident" under the policy. TCD, Inc. v. Am. Family Mutual Ins. Co., 2012 WL 1231964 (Colo. Ct. App. April 12, 2012).

   The developer, Frisco Gateway Center, LLC, contracted with TCD, the general contractor, to construct a building. TCD, in turn, subcontracted with Petra Roofing to install the roof. The subcontract required Petra to "indemnify, hold harmless, and defend" TCD against claims arising out of resulting from the performance of Petra's work on the project. Petra was also required to name TCD as an additional insured on its CGL policy.

   After a dispute arose between TCD and Gateway regarding payment and performance on the project, TCD sued Gateway and other parties seeking payment. Gateway counterclaimed against TCD for breach of contract  and negligence. TCD demanded coverage from Petra's insurer, but coverage was denied.

   TCD sued Petra and its insurer for declaratory judgment, breach of insurance contract, and negligence. The trial court entered granted summary judgment in favor of the insurer.

   On appeal, TCD contended that Gateway's counterclaims were allegations of "property damage." The court disagreed. There were no allegations in the underlying complaint of an "accident" which would trigger an "occurrence." Instead, the counterclaims alleged that Petra improperly installed the roof, resulting in a defective roof, causing TCD to breach its contract with Gateway. Further, there was no allegation that Petra caused damage beyond its own work product. The court concluded these allegations sounded in contract and tort law, and did not fit within the reasonable meaning of "property damage." 

  The court also considered the impact, if any, of Colorado's section 13-20-808, after which early versions of Hawaii's Act 83 was modeled. The Colorado statute provided,

[i]n interpreting a liability insurance policy issued to a construction professional, a court shall 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 statute, however, was not retroactive. It applied to all insurance policies currently in existence or issued on or after May 21, 2010, the date of enactment. Here, the policy was entered in 2006.