Insurance Law Hawaii

Kentucky Court Determines Anti-Assignment Provision Violates Public Policy

   In answering a certified question from the federal district court, the Kentucky Court found that a policy's anti-assignment provision was unenforceable. In Re Wehr Constructors, Inc. v. Assurance Co. of Am., 2012 Ky. LEXIS 183 (Ky. Released for Publication Dec. 20, 2012). 

   The Hospital hired Wehr Constructors to install concrete subsurfaces and vinyl floors as part of a project to expand. After installation, the floors and subsurface were damaged. The Hospital submitted a claim for $75,000 under its builders risk policy, but Assurance denied the claim.

Wehr filed suit to recover money allegedly due from the Hospital. Eventually, Wehr and the Hospital settled the claim. As part of the settlement, the Hospital agreed to assign to Wehr any claims it had under its policy with Assurance. The policy prohibited any transfer of rights under the policy without the insurer's consent. Assurance did not consent to the transfer of policy rights to Wehr. 

   Wehr sued Assurance. Assurance moved for judgment on the pleadings, invoking the anti-assignment provision of the policy. Opposing the motion, Wehr argued that since the loss for which the Hospital sought coverage had already occurred at the time of the assignment, the Hospital's right to proceeds under the policy was a chose in action that was freely assignable. Therefore, the assignment did not require the insurer's consent. 

   The federal district court certified a question to the Kentucky Supreme Court: was an anti-assignment clause that required prior written consent from the insurer before assigning a claim under a policy enforceable when the claim loss occurred before the assignment? 

   In weighing the options, the Kentucky Supreme Court noted that the majority position held that an anti-assignment clause was unenforceable once an insured occurrence took place because at that point, the insured was entitled to recovery under the policy. The right to recover was a chose in action. On the other hand, the minority rule held that the unambiguous language of an anti-assignment clause should be enforced as written. As a side note, Hawaii previously adopted this minority position in Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fund Ins. Co., 117 Hawaii 357, 183 P.3d 734 (2007).

   The court noted that the language of the provision was not ambiguous and clearly prohibited the Hospital from assigning its rights under the policy absent Assurance's consent. Nevertheless, relevant public policy interests were best served by adopting the majority rule that a non-assignment clause, while certainly enforceable prior to an occurrence of a covered loss, was not enforceable for assignments made after the occurrence.

Insurer's Summary Judgment Arguments on Proper Trigger and Ensuing Loss Fail

   The insurer promoted a variety of arguments for summary judgment to deny coverage for water damage under a homeowner's policy. Strauss v. Chubb Indem. Ins. Co., 2013 U.S. Dist. LEXIS 224 (E.D. Wis. Jan. 2, 2013). 

   Construction of the insureds' home was completed in 1994. In October 2010, they discovered water damage in the house. Claims were submitted to Chubb. Chubb had insured the home for a period of years before the insureds located the water damage. Chubb paid $85,290.05 in connection with the water damage, but asserted there was no additional amount due.

   The insureds sued for a declaratory judgment. Chubb moved for summary judgment, arguing the damage first manifested many years after the last policy issued by Chubb and that Wisconsin followed a "manifestation trigger" for first-party property policies. This meant that only the policy in effect when the loss manifested was required to respond. Further, Chubb argued that various exclusions barred coverage for the water damage. 

   The court noted that Chubb boldly asserted that the "manifestation trigger" was applicable in first-party insurance coverage cases in Wisconsin. The court disagreed because there was no Wisconsin state court precedent applying the "manifestation trigger" to first-party property insurance cases.

   Turning to the exclusions, Chubb argued that loss caused by faulty, inadequate or defective planning was barred from coverage. Ensuing covered loss was insured, however, unless another exclusion applied.

   The insureds agreed that this exclusion applied to some extent, but coverage was otherwise provided under the ensuing loss provision. The court noted that if certain exterior damage to the house was caused by faulty workmanship or materials, such damage was excluded. There were genuine issues of fact with regard to the claimed losses to exterior pieces of the house. If interior damage to the house was caused by rainwater infiltration in conjunction with faulty workmanship, that damage would be deemed to be a loss ensuing from the excluded loss caused by faulty workmanship as a matter of Wisconsin law. 

   On the state of the current record, the court concluded that genuine disputes of material fact remained as to which "risks" "caused" the homeowners' claimed and uncompensated ""direct physical" losses to the interior the house. Accordingly, Chubb's motion for summary judgment was denied.

Hawaii Federal Court Denies Motion to Certify Question on Coverage for Construction Defects

   Further demonstrating a difference of opinion between federal district court and state court trial judges, Judge Mollway denied a motion to certify a proposed question to the Hawaii Supreme Court regarding coverage for construction defects. Illinois Nat'l Ins. Co. v. Nordic PLC Constr., Inc., Civil No. 11-00515 SOM/KSC (Order Denying Defendant's Motion to Certify Question to Hawaii Supreme Court, Jan. 14, 2013)( Download Order here).

   Nordic sought coverage for alleged defects at Moanalua Shopping Center and a Safeway store. The insurer denied coverage based upon the Hawaii Intermediate Court of Appeals decision, Admiral Ins. v. Group Builders, 123 Haw. 142, 231 P.3d 67 (2010), in which the ICA  determined property damage claims caused by faulty workmanship did not arise from an "occurrence." Instead, such claims derived from breach of contract and were therefore not covered.

   In a prior decision, Judge Mollway agreed with the insurer that construction defects alleged against Nordic were not "occurrences." Judge Mollway relied not only on Group Builders, but also on the Ninth Circuit's case, Burlington Ins. Co. v. Oceanic Design & Constr., Inc., 383 F.3d 940 (9th Cir. 2004). The court also determined that Act 83, passed by the Hawaii legislature in the wake of Group Builders, did not change the analysis. Act 83 required that the meaning of "occurrence" be determined based on Hawaii law at the time the policy was entered. Here, the policy was issued post-Burlington, so Judge Mollway determined that the analysis in Group Builders was correct. 

   Nordic's current motion sought certification of the following: in light of Group Builders and Act 83, does a CGL policy that includes "products/completed operations" coverage, in the absence of an applicable policy exclusion, provide coverage for claims of property damage to the completed work of an insured if such damage arises out of the deficient performance of a construction contract by the insured or its subcontractor? The policy considered in Group Builders did not include coverage for products/completed operations. Nordic argued there was no controlling precedent from the Hawaii courts.

   Judge Mollway denied certification. While 83 was new legislation, it provided that the law applicable before Group Builders remained in effect. Burlington was not only decided before Group Builders, but also discussed Hawaii law in effect in 2004 when Burlington was issued.

   At least three state court judges have recently determined that Act 83 undermines Group Builders. One of these judges expressly considered three decisions from the Hawaii Supreme Court, decided long before Group Builders, which suggested that property damage caused by faulty workmanship does arise from an "occurrence." 

   Thanks to David Schulmeister, Esq., counsel for Nordic, for providing a copy of the order.

Insurer Must Produce Non-Privileged Documents in Bad Faith Litigation

   The insured moved for an order compelling the production of documents from the insurer after 180 pages were produced, nearly all of which were blank after redactions. See Panattoni Construction, Inc. v. Travelers Prop. Cas. Co. of Am., Case No. C11-1195RSM, Order on Motion to Compel (W.D. Wash., Dec. 14, 2012) (see order here).

   The court noted that in bad faith actions brought by an insured, communications between insurer and its attorney were not privileged with respect to the insured. 

   Several emails between the insurer's claims handler and a unit manager were not privileged. Buried within some of these email strings was a single protected attorney-client communication, which was protected by the attorney-client privilege and could be redacted from the documents produced. 

   Another email from the attorney to claims handling personnel advising that a lawsuit had been filed and asking for copies of documents was not privileged. Nor was an email from the attorney advising of document preservation obligations. Finally, an email from the claims handling department to the attorney requesting review of the claim because opposing counsel was demanding payment was not protected by the attorney-client privilege. 

Exclusions and Exceptions to Exclusions Explored

   The court considered the shifting burdens of proof regarding the liability policy's exclusions and exceptions to the exclusions. Ment Bros. Iron Works Co. Inc. v. Interstate Fire Cas. Co., 2012 U.S. App. LEXIS 25310 (2nd Cir. Dec. 11, 2102). 

   The building owner and developer hired a general contractor, who hired the insured as a subcontractor for welding. The insured completed its work between April and July 2006. At that time the owner/developer was the sole fee owner of the building.

   Subsequently, damage to the penthouse windows was discovered, allegedly caused by welding sparks. The general contractor sued the insured. The insurer, Interstate, defended, but under a reservation of rights. The policy excluded property damages "arising out of the construction of residential properties, except apartments." "Residential properties" was defined to included condominiums. "Apartments" were units in a multi-unit residential building where all units were owned by and titled to a single person or entity. Interstate reserved its rights on the ground that the damage had occurred during the construction of a condominium, citing the residential construction exclusion.

   The district court granted summary judgment to Interstate, dismissing the complaint, because the residential construction exclusion applied. 

   The Second Circuit noted that under New York law, an insurer bore the burden of proving that an exclusion applied. Once the insured met its burden, the insured had to establish the applicability of an exception to the exclusion.

   There was no dispute that the building was a new construction of a "residential property" at the time the damage occurred. The court decided that in 2006, the building was an apartment building rather than a condominium. There was one building owner and no unit had been transferred when the insured finished its welding subcontract in the summer of 2006. 

   Since the building met the definition of "apartment" at the relevant time, the insured had sustained its burden to show that the apartment exception to the residential construction exclusion applied and was therefore entitled to coverage for the loss.

Concurrent Causation Doctrine Does Not Salvage Coverage

   An exclusion for firearms in a CGL policy barred coverage despite the insured's argument that the concurrent causation doctrine should apply. Capitol Specialty Ins. Corp. v. JBC Entertainment Holdings, Inc., 2012 Wash. App. LEXIS 2835 (Wash. Ct. App. Dec. 10, 2012).

   The coverage dispute arose when an unknown person fired a gun and injured a patron at the insured's night club. The insured was sued by the injured party, who alleged the insured was liable for negligent hiring, training and supervision, and negligent failure to provide adequate security. Capitol agreed to defend under a reservation of rights, and then filed an action for declaratory judgment.

   The firearms exclusion barred coverage for "bodily injury . . . that arises out of, relates to, is based upon, or attributable to the use of a firearm." The insured argued the negligence claims fell outside of the firearms exclusion and that the exclusion was ambiguous about whether it applied to any firearms-related injury, or only to the use of a firearm by the insured. The trial court granted Capitol's motion for summary judgment.

   On appeal, the insured argued the underlying claims for negligent hiring, training, supervision and security alleged a concurrent and independent cause of the injuries and therefore fell outside of the firearms exclusion. The appellate court disagreed. The underlying claims alleged pre-assault negligence and depended entirely on the shooting. The claims thus arose out of and related to the use of a firearm. 

  Further, the exclusion was not ambiguous. The language of the exclusion unequivocally excluded coverage from bodily injury arising from the use of a firearm. 

Law Review Article Addresses Hawaii Insurance Law Developments Under Moon Court

   The current issue of the University of Hawaii Law Review includes an article I co-authored entitled, "Key Issues in Hawaii Insurance Law Answered by the Moon Court." My co-authors include Hazel Beh, Keith Hiraoka, Peter Olson, Michael Tanoue, and Alan Van Etten. The Moon Article is available at 33 U. Haw. L. Rev. 779 on Lexis and Westlaw.

 

 

 

Allegations of Actual Property Damage Necessary to Invoke Duty to Defend

   The Fifth Circuit held that under Texas law, conclusory allegations of property damage in the underlying complaint did not trigger the insurer's duty to defend. PPI Tech. Serv., L.P. v. Liberty Mut. Ins. Co., 2012 U.S. App. LEXIS 24571 (5th Cir. Nov. 29, 2012).

   Royal Production Company was the lessor and operator of three leases for oil exploration. Royal retained the insured, PPI, as its agent to assist in well-planning and oversee the drilling of wells on the leases.

   A well was drilled on one of the three leased areas, but in resulted in a dry hole. It was later discovered that the well had been drilled on the wrong lease. Royal sued PPI for negligence, claiming that PPI caused the drilling rig to be towed to the wrong location, resulting in a dry hole and "property damage." 

   Liberty Mutual denied coverage under the CGL policy issued to PPI. PPI then sued Liberty Mutual for breach of contract. Liberty Mutual prevailed on summary judgment, contending it had no duty to defend or indemnify PPI because the underlying lawsuit did not contain factual allegations of "property damage" caused by an "occurrence." 

   The Fifth Circuit affirmed because no specific facts about the type or kind of harm were alleged, and therefore no factual allegations of "property damage" were made.

   The relevant allegations were as follows:

    PPI caused the drilling rig to be towed to and placed upon the wrong location. Subsequently, towing the rig to the wrong lease resulted in the well being drilled in the wrong location and a dry hole. Drilling in the wrong location caused Royal to expend in excess of $4.2 million for the drilling of the well in the wrong location.

   The mere use of the phrase "property damage" and parroted policy language was not sufficient. None of the assertions of "property damage" in the underlying complaint were accompanied by facts illustrating specific harm or damage to tangible property.

   The result may have been different under Hawaii law where, when analyzing the duty to defend, the insurer must show it would be impossible for the underlying plaintiffs to prevail against the insured on a claim covered by the policy. Dairy Rd. Partners v. Island Ins. Co., 92 Haw. 398, 412-13, 992, P.2d 93, 107 (2000). Therefore, a Hawaii court may agree that it possible that allegations of "property damage" would be covered.

 

Loss Caused by Subcontractor's Faulty Work Covered in Georgia

   The Georgia Court of Appeals found a subcontractor was covered under a CGL policy for loss caused by alleged faulty workmanship. Maxum Indem. Co. v. Jimenez, 2012 Ga. App. LEXIS 970 (Ga. Ct. App. Nov. 20, 2012).

   Jimenez was hired as a subcontractor to install pipes for a dormitory construction project at Georgia Southern University. Subsequent to the construction, a pipe burst occurred at the dormitory, causing damage to several units. After a jury trial, Jimenez was found liable for $191,382 in damages that arose from his negligent pipe work. 

   Jimenez was insured under a CGL policy issued by Maxum. Maxum filed a suit for a declaratory judgment, seeking a declaration that the claim against Jimenez was not covered.

   On appeal, Maxum contended the underlying claim did not constitute "property damage" caused by an "occurrence." Prior decisions from the Georgia Supreme Court had established that a subcontractor's faulty workmanship that causes unforeseen or unexpected damage to other property was an "occurrence." Here, there was no evidence that Jimenez's plumbing mistakes were expected or intentional. Therefore, the trial court correctly determined that Jimenez's acts constituted an "occurrence" involving "property damage."

   Maxum argued there was no coverage nonetheless because the judgment entered against Jimenez in the underlying suit was for only contractual indemnity and breach of contract. Although the complaint against Jimenez set forth both a breach of contract claim and a tort claim, both claims were based upon defective workmanship in the pipe installation and the resulting property damage to the dormitory. The sole basis for the award of damages was the claim for the damage to the property. 

   Maxum also argued the exclusion for contractual liability applied. Again, the appellate court disagreed. Jimenez's obligation to pay the damages award was not based upon a contractual assumption of liability, but rather was based upon his tort liability arising from his own negligent pipe workmanship. 

   On similar facts, the Hawaii Intermediate Court of Appeals arrived at the exact opposite conclusion in Group Builders v. Admiral Ins. Co., 132 Haw. 142, 231 P.3d 67 (Haw. Ct. App. 2010), where it was decided that construction defects were not covered by CGL policies because such claims were contract based.