Insurance Law Hawaii

No Duty to Defend Negligent Misrepresentation Claim

   The Texas Court of Appeals decided there was no duty to defend claims of both negligence and negligent misrepresentation in Branham v. State Farm Lloyds, 2012 Tex. Ct. App. LEXIS 7736 (Tex. Ct. App. Sept. 12, 2012).

   The insured sold her home to the McCulloughs. After moving into their new home, the McCulloughs sued the insured, alleging she falsely represented that there was no previous flooding or water penetration into the home nor termite problems. The complaint further alleged that the insured failed to disclose the previous problems in the home. Causes of action alleged against the insured included negligence for failing to properly disclose the condition of the home and negligent misrepresentations by supplying false information.

   The insured tendered to State Farm, but it refused to defend. The insured then sued State Farm. The parties filed competing motions for summary judgment. State Farm argued the underlying complaint did not allege damages arising from a covered occurrence or property damage. Further the policy excluded intentional conduct. The trial court granted State Farm's motion.

   The Court of Appeals affirmed. The insured argued she could have "negligently" forgotten about the prior damage to her home. The underlying complaint, however, alleged the insured made false representations and made cosmetic repairs to conceal the prior damage. The mere characterization of negligence, alternatively made, was insufficient to convert claims based on  knowing misrepresentation into a claim for recovery of property damage caused by an accident within the meaning of the insurance policy.

No Duty to Indemnify When Discovery Shows Faulty Workmanship Damages Insured's Own Work

   Our post last week addressed the duty to defend when alleged faulty workmanship caused loss to property adjacent to where the insured was working. See Pamerin Rentals II, LLC v. R.G. Hendricks & Sons Constr., Inc., 2012 Wis. App. LEXIS 698 (Wis. Ct. App. Sept. 5, 2012) [post here]. Today, we report on recent developments in the same case where the court determined, despite earlier finding the insurer owed a defense, it had no duty to indemnify. Pamperin Rentals II, LLC v. R.G. Hendricks & Sons Constr., Inc., 2012 Wisc. App. LEXIS 793 (Wis. Ct. App. Oct. 10, 2012).

   Hendricks contracted to "prepare the site and supply and install concrete, tamped concrete, and colored concrete" at several service stations. The owner sued Hendricks, alleging the concrete "was defective and/or the work performed was not done in a workman-like manner and resulted in damages, and will require replacement."

   Pekin Insurance Company agreed to defend Hendricks subject to a reservation of rights. During discovery, the owner disclosed that only the concrete suffered physical damage, not other, adjacent property. Pekin moved for summary judgment, arguing it had to duty to indemnify or further defend because there was no policy coverage for the owner's alleged damages. Pekin argued there was no occurrence. Even if there was, the business risk exclusions k. and l. applied, precluding coverage for damage to the insured's product and work. The lower court granted summary judgment to Pekin.

   The court of appeals first noted that under Wisconsin law, once the insurer agreed to defend, it could consider extrinsic evidence. If there was no arguable coverage, the court could determine on summary judgment that there was no duty to indemnify. Thus, when the court concluded there was no duty to indemnify, the insurer was relieved of its duty to further defend the insured. Because discovery demonstrated only the concrete was damaged and not the asphalt and plumbing, there was no physical injury or loss of use covered by the policy.

   The court also agreed that the business risk exclusions prevented coverage for damage to Hendrick's products or completed work, i.e., the damaged concrete. Consequently, Pekin had no duty to indemnify or further defend Hendricks.

   Under Hawaii law, the duty to defend is determined at the time of tender. Dairy Rd. Paterns v. Island Ins. Co., 92 Haw. 398, 423, 992 P.2d 93, 118 (2000). When analyzing the duty to defend, the insurer cannot look to extrinsic evidence to demonstrate there is no duty to indemnify, and then argue because there is no coverage, there is no longer a duty to defend. Accordingly, in the fact situation presented above, Pekin would have been obligated to continue defending Hendricks even if it had no duty to indemnify.

Cogently Written Opinion Finds Coverage for Loss Caused By Defective Concrete

   If ever in need of a concise, well-reasoned opinion on "occurrence," "property damage" and applicability of the business risk exclusions, turn to Pamperin Rentals II, LLC v. R.G. Hendricks & Sons Construction, Inc., 2012 Wis Ct. App. LEXIS 698 (Wis. Ct. App. Sept. 5, 2012).

   A contractor was hired to install concrete during construction of seven gas stations. Red-D-Mix provided the concrete. The contractor and Red-D-Mix were eventually sued by the gas stations, based upon allegations that the concrete was defectively manufactured and installed. The gas stations alleged that Red-D-Mix supplied concrete that was defective and resulted in damages, including the need to repair nearby asphalt.

   Red-D-Mix tendered to its insurers, who denied coverage. Suit was filed and the insurers moved for summary judgment. The trial court determined there were no allegations of either "property damage" or an "occurrence." Therefore, there was no duty to defend or indemnify Red-D-Mix.

   The Court of Appeals first noted that the underlying complaint alleged property damage by stating the concrete was "defective and has resulted in damages, including pitting and deterioration of the concrete." The complaint also alleged Red-D-Mix's breach would cause Plaintiffs' damage, including "concrete and asphalt repair."

   Next, the court found an "occurrence" was alleged. The court agreed with the insurers that faulty workmanship that only damaged the insured's own work or product was not an occurrence. (Here, I would take issue with the opinion. It seems to me that damage to Red-D-Mix's concrete would constitute an "occurrence," but exclusions for faulty workmanship to the insured's own work or product would bar coverage). Damage to the asphalt, however, qualified as an occurrence. Even though the defective concrete was faulty workmanship, that faulty workmanship allegedly caused damage to other property, i.e., the asphalt.

   The court then turned to the exclusions. Exclusion j (5) barred coverage for property damage to "that particular part of real property [the insured is working on] if the 'property damage' arises out of those operations." The underlying complaint, however, did not allege that Red-D-Mix performed operations at any of the gas station sites. Further, assuming Red-D-Mix performed operations at the site, there was no indication that those operations damaged "that particular part" of the property on which Red-D-Mix was working. Instead, the defect in the concrete caused damage to both the concrete itself and to the adjacent asphalt.

   Exclusion k barred coverage for "'Property damage' to 'your product' arising out of it or any party of it." Exclusion l provided there was no coverage for "'Property damage" to 'your work' arising out of it or any part of it." Admittedly, these exclusions prevented coverage for any damage to Red-D-Mix's concrete caused by the concrete itself. But damage to the asphalt did not fall within the exclusions.

   The court next considered Exclusion m, which excluded coverage for property damage to "impaired property." The policy defined "impaired property" as that which was capable of being restored to use by "the repair, replacement, adjustment or removal" of the insured's work or product. If property could not be restored to use, it was not impaired property. If the asphalt was damaged, it could not be restored to use by the repair, replacement, adjustment or removal of the concrete. Instead, the asphalt itself had to be removed and replaced.

   Finally, Exclusion n stated there was no coverage for "your product" or "your work" when such product, work or property was withdrawn or recalled from the market or from use. There was no evidence Red-D-Mix's product had been withdrawn or recalled from the market or from use.

   Unfortunately, this opinion is unpublished. The careful, deliberate reasoning offered here differs substantially from that of the Hawaii Intermediate Court of Appeals, which, in an abbreviated decision, found no coverage for construction defects in Group Builders v. Admiral Ins. Co., 123 Haw. 142, 213 P. 3d 67 (Haw. Ct. App. 2010).

Anti-Assignment Clause Enforced

   The court found an anti-assignment provision enforceable, thereby denying coverage for the assignee. Dameron Hospital Assoc. v. State Farm Mutual Automobile Ins. Co., 2012 U.S. Dist. LEXIS 146577 (E.D. Cal. Oct 20, 2012).

   Dameron Hospital provided emergency medial treatment to three individuals who were in automobile accidents and had coverage through State Farm. Each individual assigned benefits from his or her policy by signing a conditions of admission form which assigned policy rights to Dameron up the the amount of charges by the hospital.

   State Farm denied coverage because its policy stated, "No change of interest in this policy is effective unless we consent in writing." State Farm never gave written consent to the three insureds' purported assignments.

   The court noted that under California law, contracts may expressly provide that they are not to be assigned and such provisions were enforcable. Dameron argued there was a strong public policy in favor of free transferability of all types of property and the prohibition did not apply where all that remained to be done under the contract was the payment of money.

   The court held the anti-assignment provision was enforceable here and granted summary judgment to State Farm. State Farm had never consented to the assignment. Further, at the time of the assignments, Dameron's claim for benefits had not been reduced to a sum of money due or become due under the policy.

Late Notice Bars Claims for Hurricane Damage

   Thinking the loss to their property could not meet the deductible, the insureds failed to file timely notice, thereby barring their claim. Slominski v. Citizens Prop. Ins. Corp., 2012 Fla. App. LEXIS 16730 (Fla. Ct. App. Oct. 3, 2012).

   After Hurricane Wilma hit Florida on October 24, 2005, the insureds made minimal repairs to their home, costing approximately $1500, well under their policy deductible of $12,860. Three and a half years later, the insureds filed a claim with Citizens based on wind and water damage to their home caused by Hurricane Wilma. Citizens denied the claim, citing the prompt notice requirement. When the insureds sued, the trial court granted summary judgment to Citizens.

   In support of their motion and response, the insureds filed depositions and affidavits of their contractor whom the insureds hired to construct an addition to their home in January 2009 and engineer who inspected the home, also in January 2009. Both the engineer and contractor were deposed in August 2012, prior to their giving affidavits.

   In his deposition, the contractor concluded that the wind damage could not have occurred without hurricane-force winds, but admitted he was uncertain as to whether the loss was caused by Hurricane Wilma, as opposed to Hurricane Frances in 2004. In his affidavit, on the other hand, he stated the damages occurred as a result of Hurricane Wilma.

   Meanwhile, the engineer testified at his deposition that he was unable to determine exactly when the interior staining or roof damage occurred, but opined only that it was caused by a hurricane. He admitted that his conclusions about the wind-driven rain were based on facts presented by the insureds. In hit affidavit, however, he stated he was able to determine that the damages to the house was due to Hurricane Wilma's driving rains.

   On appeal, the insureds argued that the affidavits gave rise to genuine issues of material fact, precluding summary judgment. The court disagreed and affirmed summary judgment in favor of Citizens. The subsequent affidavits were inconsistent with the prior deposition testimony. Therefore, the insureds were not able to rely upon them in opposition to summary judgment. Without the affidavits, the insureds failed to meet their burden of proving lack of prejudice to Citizens for the late notice.

 

Insurer's Denial of Document Restoration Claim Improper

   The federal district court considered the applicability of a document retention clause in Amtex Bancshares v. Bancinsure, Inc., 2012 U.S. Dist. LEXIS 140557 (E.D. Tex Sept. 11, 2012).

   Hurricane Ike caused severe damage to the insured's bank on September 13, 2008. The policy issued by Bancinsure, Inc. covered the property and its contents. The insured submitted its claims to Bancinsure, which made some payments. A large amount of banking documents was damaged and had to be restored. The total cost of unpaid document restoration was $293,982. The insured sued.

   An endorsement limited coverage to "specified causes of loss" under the policy, defined, in relevant part, "to windstorm and water damage sustained due to accidental discharge or leakage of water." In its motion for summary judgment, Bancinsure argued coverage for damage to the documents did not include water damage caused by flood.

   Bank employees testified they did not know how the documents became wet. Some damaged documents were above the flood line. Bancinsure argued that even if the insured could establish that the documents above the flood line became damp or mildewed because of something other than flood, the insured had no way of segregating the costs related to flood damage separated from the costs relating to other causes.

   The court denied summary judgment on the document restoration. Based on the witnesses' testimony, it was possible that the restoration damages were due, in at least some part, to a cause other than flood. One witness testified that at least some of the documents were damaged from an excess amount of moisture due to wind and "stuff protruding through the roof." Accordingly, there was at least some evidence that the document restoration costs could be partially covered under the policy.

 

Exclusion Bars Coverage for Mold, Fungus

   The court considered whether rain damage to a house was barred by the policy's mold exclusion. Stewart v. State Farm Fire & Cas. Co., 2012 U.S. Dist LEXIS 127804 (D. S.D. Sept. 7, 2012).

   The insureds hired DJ Construction to build a new home. Before construction was completed, it was discovered that DJ Construction and some of its subcontractors had failed to protect the partially constructed house from the elements, which allowed melting snow and rain to intrude into the house. Soon after this discovery, DJ Construction abandoned the project. The house remained incomplete and uninhabitable.

   The insureds sued DJ Construction. They also filed a claim under their homeowner's policy with State Farm. The insureds claimed the cause of their loss was rainwater. When the claim was denied, the insureds sued State Farm.

   The fungus exclusion contained an "anti-concurrent causation clause," which stated the policy did not cover any loss which would not have occurred in the absence of fungus regardless of "whether other causes acted concurrently or in any sequence with the excluded event to produce the loss." The court held this provision precluded application of the efficient proximate cause doctrine to the fungus exclusion itself. The insureds could not recover for any loss that would not have occurred in the absence of fungus, regardless of whether a covered peril was the efficient proximate cause of the loss.

 

Ensuing Loss Provision Does Not Salvage Coverage

   The insureds unsuccessfully argued that water damage to their home was covered by the ensuing loss provision. Friedberg v. Chubb & Son, 2012 U.S. App. LEXIS 18817 (8th Cir. Sept. 7, 2012).

   The insureds' home was built in 1989. In 2006, extensive water damage was found to the house. The insureds notified their carrier, Chubb. The insureds had coverage for all risks unless stated otherwise in the policy or if an exclusion applied.

   Chubb hired an adjustor who determined that defective construction had enabled water to enter the wall and beam systems. Chubb denied coverage under the faulty planning, construction or maintenance exclusion. The exclusion also provided, "[W]e do insure ensuing covered loss unless another exclusion applies."

   The insureds sued Chubb. The district court granted summary judgment for Chubb, holding that the water damage was a loss caused by faulty construction and therefore excluded under the policy.

   On appeal, the insureds first argued that the policy covered the water damage to their home under the concurrent causation doctrine. The loss occurred from the presence of water (a covered peril) and from faulty construction (an uncovered peril). The court found if an excluded period was the efficient and proximate cause of the loss, then coverage was excluded. The faulty construction of the insureds' house was the efficient and proximate cause of the loss, or the overriding cause. Once the house was plagued with faulty construction, it was foreseeable that water would enter. Although water intrusion played an essential role in the damage to the house, it was not an independent and efficient cause of the loss.

   Further, coverage was not restored by the ensuing loss clause. Under Minnesota law, the ensuing loss provision excluded from coverage the normal results of defective construction and applied only to distinct, separable, ensuing losses.

 

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No Ambiguity Can Exist Between Standard Flood Policy and Its Declaration Page

   The First Circuit considered whether an alleged ambiguity on the scope of coverage between the Declarations Page and a Standard Flood Insurance Policy ("SFIP") would allow coverage to the insured. McGair v. Am. Bankers Ins. Co. of Florida, 2012 U.S. App. LEXIS 185911 (1st Cir. Sept. 4, 2012).

   The insureds home was damaged by a flood. The flooding caused damage to furniture, furnishings, appliances and fixtures, much of which was located in the insureds' basement. After a claim was filed with American Bankers, an adjuster came to the house and recommended a payment of $4,307.91. The insureds rejected the payment from American Bankers, contending their loss was $40,614.52.

   The disagreement was based on the scope of the policy's coverage for the contents of the insureds' basement. The insureds argued that the Declarations Page indicated the entire contents of their basement was covered without limitation. There was an ambiguity because terms of the SFIP limited coverage for items located in the basement of a dwelling to such things as central air conditioners, furnaces, and insulation.

   The insureds filed suit, but the district court awarded summary judgment to American Bankers.

   The First Circuit affirmed. No ambiguity between the SFIP and the Declarations Page could exist because by regulation, the terms of the SFIP controlled. The regulations provided that "no provision of the [SFIP] shall be altered, varied, or waived other than by the express written consent of the Federal Insurance Administrator." Assuming there was an ambiguity, general insurance law principles applicable to the interpretation of ambiguities had to give way to federal regulations dictating the terms of the SFIP.

   The insureds also argued that any award in the case would not actually be paid from the federal treasury, but by American Bankers, because the company acted outside the scope of its agreement with the government in preparing the Declarations Page. The court disagreed. The governing regulations stated the Federal Insurance Administrator could choose not to reimburse an insurance company if the litigation was based upon agent negligence. The insureds here did not allege that American Bankers acted outside the scope of its obligations under the National Flood Insurance Program.