Insurance Law Hawaii

Uninsured Party Has No Bad Faith Claim Against Insurer

   The West Virginia Supreme Court of Appeals affirmed the dismissal of plaintiffs' bad faith claim because they were not insureds under the policy. Triad Insulation, Inc. v. Nationwide Mut. Fire Ins. Co., 2013 W.Va. LEXIS 768 (W. Va. June 24, 2013). 

    Triad Insulation was the sole named insured under a commercial property policy issued by Nationwide. Plaintiff Brian Galligan was the president/owner of Triad. The policy covered a building that Triad used as its principle place of business. The building was owned by Brian Galligan's wife, Plaintiff Helen Galligan. 

   During the Nationwide policy period, the building suffered structural damage to the roof due to large amounts of snow and ice. A claim was submitted to Nationwide. 

   Triad and Mr. and Mrs. Galligan eventually sued, alleging that Nationwide mishandled the adjustment of the loss by refusing to authorize necessary repairs, which eventually resulted in the total loss and demolition of the building.

   Nationwide filed a motion to dismiss count five of the complaint, which claimed the Galligans' loss of personal property in the building. The Gallilgans alleged that Nationwide failed to exercise reasonable care in adjusting this claim. The circuit court granted the motion to dismiss because plaintiffs were not insured under the policy.

   The Supreme Court agreed that the Galligans, third parties to the insurance contract, could not sue Nationwide in tort for duties defined by the policy. The court further noted that Triad had been paid the full policy limits for loss of the building and Triad still had pending its own bad faith claim against Nationwide.

   The holding in Triad Insulation, Inc. is similar to the Hawaii Supreme Court's decision in Young v. Allstate, 119 Haw. 403, 198 P.3d 666 (2008). In Young, the plaintiff's bad faith claim against the insurer of the driver who hit her, Allstate, was dismissed because she was not an insured under the policy. Mrs. Young's claim for intentional infliction of emotional distress against Allstate survived, however, because it was an issue preserved for the jury. 

 

Mediation and Late Appraisal Request Does Not Toll Statute of Limitations

   The court agreed with State Farm that the insureds' request for an appraisal made after the statute of limitations had run was too late. Stolz v. State Farm Fire and Cas. Co., 2013 U.S. Dist. LEXIS 86834 (S.D. Miss. June 20, 2013). 

   The insureds' property sustained damage from Hurricane Katrina. State Farm performed an inspection and concluded that both wind and rain contributed to the loss. On November 8, 2005, State Farm denied the claim insofar as it related to flood damage, which was excluded from coverage. State Farm paid $993.69 for wind damage caused by the hurricane. 

   A year and a half after State Farm paid $993.69, the insureds requested mediation of their claim for the remaining loss. On August 22, 2007, an impasse was declared on the mediation. On July 6, 2010, the insureds requested an appraisal. State Farm declined to enter an appraisal because the three year statute of limitations had already expired on the insureds' claim. 

   On January 27, 2012, a year and a half after the appraisal request was denied, the insureds filed suit claiming breach of contract and breach of the duty of good faith and fair dealing. State Farm moved for summary judgment seeking dismissal on the grounds that the insureds' claims were barred by the statute of limitations.

      State Farm argued the statute of limitations began to run on November 8, 2005 and expired on November 9, 2008. The insureds did not file their complaint until January 27, 2012. Therefore, State Farm argued that the request for appraisal on July 6, 2010, was made outside the limitations. Even if the demand was within the statute of limitations, such demand would not toll the statute of limitations.

   The insureds argued that based upon the mediation and their July 6, 2010 request for appraisal, State Farm should be estopped from refusing to participate in the appraisal process and should be required to comply with the terms of the policy.

   The court agreed with State Farm. The denial of flood coverage was clearly communicated on November 8, 2005, meaning the statute of limitations expired three years later. Participating in mediation did not toll the statute. Even if State Farm's participation tolled the limitations period for the 78 days of mediation, the statute of limitations would have still expired on January 26, 2009, well before the insured made their appraisal demand on July 6, 2010, or filed their complaint on January 27, 2012. While some other jurisdictions did permit tolling based on appraisal, they only did so after both parties agreed to engaged in the appraisal. Even then, the statute of limitations would not restart but would merely suspend during the appraisal proceedings. 

Ninth Circuit Rejects Creative Expansion of Montrose

   The insured's effort to expand the California Supreme Court's decision in Montrose did not survive the Ninth Circuit's review. City of San Buenaventura v. The Insurance Company of the State of Pennsylvania, 2013 U.S. App. LEXIS13084 (9th Cir. June 26, 2013).

   The City of San Buenaventura contracted with a developer to build condominium units for low and moderate income residents. Sale and resale prices were restricted by ceilings governing the development. 

   In 2004, a number of buyers sued the City and the developer, alleging that they bought low-income condominiums in 2001 without being told that their condominiums were subject to low-income ceilings. The alleged they had paid prices higher than the ceilings. They argued that the City had negligently failed to tell them about the low-income price ceilings. 

   The condominium buyers sued the City. In 2007, three years after the underlying suit began, the City tendered the action to its two insurers. Both insurers denied coverage, saying that the alleged negligence occurred prior to their policy periods.

   The City sued its two insurers. Summary judgment was granted by the trial court to both insurers because any occurrence took place prior to the policy periods.

   The Ninth Circuit affirmed. It was undisputed that the City's alleged negligence occurred in 2001, prior to the policy periods. The City argued that because the condominium buyers continued to suffer under the burden of having overpaid and having their resale prices restrained by a ceiling, the "occurrence" continued into the policy periods. To make this argument, the City relied upon Montrose Chemical Corp. v. Admiral Ins. Co., 913 P.2d 878 (Cal. 1995). 

   The court felt the City stretched Montrose too far. The policy language was more restrictive that that used in the Montrose case. Here, the policy promised indemnification for loss caused by property damage "first arising out of an Occurrence during the Policy Period." The Montrose policies required only damages during the policy period, but the Great Lakes policy required the occurrence causing the damage to have been during the policy period.

   Here, the condominium buyers alleged that they were damaged by the City's negligence when they purchased their units in early 2001. This was before the insurers' policy periods. 

Georgia Supreme Court Determines Damage to "Other Property" Not Necessary for Finding Occurrence

   The Georgia Supreme Court has determined that an "occurrence" may arise under a CGL policy even if "other property" is not damaged. Taylor Morrison Servs. v. HDI-Gerling Am. Ins. Co., 2013 Ga. LEXIS 618 (Ga. July 12, 2013).

   Taylor Morrison, the insured, was a homebuilder. It was sued in a class action by more than 400 homeowners in California alleging that the concrete foundations of their homes were improperly constructed. This led to water intrusion, cracks in the floors and driveways, and warped and buckled flooring.

   At first, HDI-Gerling defended under a reservation of rights. Subsequently, however, HDI-Gerling sued Taylor Morrison in federal district court in Georgia, seeking a declaratory judgment that there was no coverage. The district court granted summary judgment to HDI-Gerling after determining that there was no "occurrence" when the only "property damage" alleged was damage to work of the insured. Georgia law was applied to the dispute.

   On appeal, the Eleventh Circuit presented certified questions to the Georgia Supreme Court. The first question asked whether an "occurrence" under Georgia law required that property other than the insured's completed work itself by damaged. The court was guided by its prior decision in Am. Empire Surplus Lines Ins. Co. v. Hathaway Dev. Co., 707 S.E. 2d 369 (2011) [post here]. There, the court established that faulty workmanship sometimes can amount to an "occurrence," at least when the property of someone other than the insured was damaged. The same outcome was required when the insured's own property suffered from "property damage." Therefore, an "occurrence" did not require damage to the property or work of someone other than the insured.

    The second certified question asked whether an "occurrence" required that the liabilities for which coverage was sought must be based on some legal theory other than fraud or breach of warranty. Fraud was inconsistent with the notion of an '"accident." Therefore, a claim for fraud could not possibly involve an "occurrence."

   Breach of warranty, however, was different. Breach of warranty could be intentional and therefore not covered. On the other hand, faulty workmanship could cause a product or other work to amount to a breach of a warranty for the work. Therefore, in many cases, an "occurrence" could be found in the context of a claim for breach of warranty.

   However, when faulty workmanship was the "occurrence," "property damage" could be found only when the faulty workmanship caused physical injury to, or the loss of use of, nondefective property or work. Therefore, it would only be a breach of warranty of nondefective property from which coverage might arise, as liability for a breach of warranty of the defective property would not involve "damages because of" "property damage" to the nondefective property.

 

Reversing Itself, West Virginia Supreme Court Holds Construction Defects Are Covered

   The West Virginia Supreme Court previously held that construction defects were not covered under a CGL policy.  The Court, however, reversed itself in Cherrington v. Erie Ins. Prop. & Cas. Co., 2013 W.Va. LEXIS 724 (W.V. June 18, 2013).

   The underlying complaint against the general contractor alleged various defects in the plaintiff’s recently constructed house, including an uneven concrete floor, water infiltration through the roof and chimney joint, a sagging support beam, and numerous cracks in the drywall walls and partitions throughout the house. Erie Insurance denied coverage. The insured general contractor sued, but the trial court found that faulty workmanship was not sufficient to give rise to an “occurrence.” 

   The West Virginia Supreme Court reversed its prior rulings determining there was no coverage for construction defects. The court recognized its prior position was in the minority, as is Hawaii's position on coverage for construction defects. See Group Builders Inc. v. Admiral Ins. Co., 123 Haw. 142, 148, 231 P.3d 67, 73 (Haw. Ct. App. 2010). Now joining the majority position, the West Virginia Supreme Court found that defective workmanship causing property damage was an “occurrence” under a CGL policy. Further, the homeowner had demonstrated that she sustained "property damage" as a result of the allegedly defective construction of her home.

   The trial court also determined that the business risk exclusions barred coverage. Again, the West Virginia Supreme Court disagreed.

   First, Exclusion L, barring coverage for "'property damage' to your work arising out of it or any part of it," also had an exception where the work was performed by subcontractors. Therefore, Exclusion L excluded coverage for the work of the insured but did not operate to preclude coverage for work performed by the insured's subcontractors. The majority of the work was done by subcontractors. Therefore the exclusion did not apply.

   Next was Exclusion M, which precluded coverage for (1) a shortcoming in "your product" or "your work" and (2) a delay or failure to act arising from the insured's or the insured's agent's failure to perform its contractual obligations. Again, the majority of the work was done by the insured's subcontractors. But "your work" was defined as either "work or operations performed by you" or "work or operations performed . . . on your behalf." This would mean Exclusion M precluded coverage for the very same work of subcontractors that Exclusion L specifically found covered by the policy. An absurd result would be created. Therefore, the court found that the first provision of Exclusion M did not operate to bar coverage for work performed by the insured's subcontractors.

   Regarding the second proviso of Exclusion M, there was no evidence that the  physical damage to the homeowner's home was attributable to breach of contract or failure to perform contractual obligations. Therefore, the Exclusion was not applicable here to bar coverage. 

   Finally, Exclusion N excluded coverage for damages claimed for loss of use, recall, replacement, removal, etc. This exclusion originated to limit insurers' liability for damages attributable to recalled products. Here, none of the products used in the construction of the home had been recalled from the market as contemplated by the exclusion. Further, the policy provided coverage for the work of subcontractors. To apply this exclusion to preclude coverage for damages due to the very same work that the policy expressly covered would render such coverage illusory and would be contrary to the policy's stated intention to provide indemnity for this specific loss. Therefore, Exclusion N did not bar coverage.

Exclusions Preclude Loss Caused by Heavy Rains

   Exclusions in the plaintiffs' policy barred coverage for loss caused by heavy rain storms. Emsbo v. Fireman's Fund Ins. Co., 2013 U.S. Dist. LEXIS 86072 (D. R.I. June 19, 2013).

   Torrential rain and historic flooding was experienced in Rhode Island in March 2010. The heavy rains over-flowed plaintiffs' rain gutters and flooded the ground around the house. The water then came through a crack in the foundation, moving water and sand into the basement. Repairs were made, but another heavy rain arrived a week later, again bringing water and sand into the basement. After the rains subsided, the plaintiffs noticed mildew in the basement.

   Plaintiffs submitted a claim to Fireman's Fund. The claim was denied under the policy's exclusions for water damage and fungi. Litigation ensued.

   The court agreed that the loss was excluded by the policy. Plaintiffs argued that the policy covered damage from a sudden rainstrom. The Fireman's Fund policy, however, excluded coverage for water damage caused by water below the surface of the ground, which seeped or leaked through the foundation. "Dampness" was also excluded unless the damage was the direct cause of the loss was rain. This exception to the exclusion was not applicable because the water damage was caused not by rain, but by the by water seeping through the foundation into the basement.

   Fungi was only covered if it was the result of a cause of loss otherwise covered by the policy. The mold here, however, was caused by the seeping water and therefore not a loss otherwise covered by the policy. 

Federal Court Remands Flood Policy Dispute to State Court

   Plaintiff sued her adjuster in state court after Hurricane Sandy caused flood damage to her home. Plaintiff alleged her insurance company paid her too much money based upon the adjusters' fradulent conduct. After defendants removed the case to federal court, the court granted plaintiff's motion to remand to state court. Brooks v. Foglio, 2013 U.S. Dist. LEXIS 93242 (D. N.J. July 2, 2103).

   Plaintiff had a Standard Flood Insurance Policy under the National Flood Insurance Program ("NFIP"). After Hurricane Sandy passed, plaintiff made a flood loss claim with her insurer. Plaintiff hired a public adjuster, Dennis Molette, to handle the details of the flood damage claim. Colonial Claims was hired by the insurer to also adjust Plaintiff's claim. The adjusters valued the damage to plaintiff's house at $80,000. 

   Plaintiff then hired Foglio Handyman and Carpentry Services to handle the repairs to her home. Foglio workers eventually walked off the job, leaving debris both inside and outside plaintiff's home, as well as an extensive amount of work to be completed. 

   Plaintiff sued Colonial, Molette and Foglio in state court for causes of action sounding in contract, fraud, and negligence. As to Molette and Colonial, plaintiff alleged an overpayment of her claim by fraud. She felt the damage to her home only amounted to $5000.

   Colonial removed the action to federal court. Colonial did not receive consent for removal from Foglio and Molette, however. Colonial then filed a motion to dismiss plaintiff's compalint. In response, plaintiff filed a motion to remand. 

   A federal statute, 42 U.S.C. 4072, stated that upon disallowance of a claim by FEMA, the claimant could institute an action in U.S. District Court against FEMA, and original exclusive jurisdiction was conferred upon the District Court. Federal regulations provided that all disputes arising from the handling of any claim were governed exclusively by the flood insurance regulations issued by FEMA, the National Flood Insurance Act and Federal common law. Some courts had held that NFIA preempted state law claims against insurance companies issuing flood policies and the adjuster they hired.

   Here, however, the court held that removal by Colonial was improper. The case involved only causes of action sounding in state law and there was no diversity of citizenship. Colonial argued that state law claims brought against an adjuster were preempted by federal law. 

   Colonial confused the difference between preemption and jurisdiction. Preemption meant that any state law which conflicted with or interfered with federal law was invalid. Jurisdiction, on the other hand, referred to the court's power to hear a case. Therefore, that state law claims against adjuster are preempted by the National Flood Insurance Act did not mean that section 4072 vested district courts with original jurisdiction over those claims. Instead, any court confronting such a claim must dismiss it as preempted. 

   Further, section 4072 granted jurisdiction to the federal court in cases involving the "disallowance" of a claim. The case here did not involve the disallowance of a claim, but rather overpayment.

   Finally, removal was improper because Colonial failed to get the consent of the other two defendants, Molette and Foglio. 

   Therefore, plaintiffs motion to remand was granted and Colonial's motion to dismiss was denied.

Federal Court Finds Occurrence for Faulty Workmanship Under Virginia Law

    The Federal District Court in Virginia found that allegations of faulty workmanship could arise from an occurrence. Nautilus Ins. Co. v. Strongwell Corp., 2013 U.S. Dist. LEXIS 79163 (W. D. Va. June 4, 2013).

   Strongwell supplied certain fiberglass reinforced plastic materials to a subcontractor of Black & Veatch for a construction project at power plant. Black & Veatch subsequently sued Strongwell, claiming that numerous defects in Strongwell's materials and work were discovered after the project was completed. The complaint further alleged that as a result of the defects, there was widespread property damage to portions of the power plant. 

   Nautilus defended under a reservation of rights. Nautilus also filed suit for a declaratory judgment that to establish it had no duty to defend or indemnify Strongwell. Strongwell moved to dismiss the complaint insofar as it requested a declaration that there was no duty to defend. Strongwell also filed a motion to stay the coverage action until the underlying case was completed.

   In response to the motion to dismiss, Nautilus argued it was unnecessary because it was defending Strongwell. Further, the motion was premature because the duty to defend could be more conclusively determined after discovery was conducted. The court disagreed the motion was unnecessary because Nautilus expressly sought a declaratory judgment that it had no duty to defend. The court also disagreed the motion was premature because the duty to defend was determined by the eight corners rule - i.e., comparing the allegations of the underlying complaint with the terms of the policy.

   Turning to the merits, Nautilus argued there was no "occurrence" because the underlying allegations alleged faulty workmanship and defective product supplied by Strongwell. The court noted that the damages sought in the underlying action were not limited to the costs of repairing or replacing Strongwell's purportedly defective work product. There were also allegations that Strongwell provided a defective product that caused physical damage to other property which Black & Veatch was required to repair. Therefore, the allegations were sufficient to support the possibility of an "occurrence" under the policy, thereby giving rise to potential coverage.

   Nautilus also relied upon two exclusions to relieve it of the duty to defend. For Nautilus to be successful, the allegations in the underlying action had to clearly and unambiguously establish that one or more of the exclusions applied to bar coverage for the claims asserted by Black & Veatch. 

   The first exclusion relied upon by Nautilus was the contractual liability exclusion. The amended complaint, however, did not allege that Strongwell had any contract with Black & Veatch, or that Strongwell otherwise agreed to assume liability for any damages sought by Black & Veatch. Instead, the claims for property damage against Strongwell included tort claims and statutory causes of action for the alleged breach of obligations imposed by law, rather than by contract. 

   The second exclusion relied upon by Nautilus was the Professional Liability Exclusion. The exclusion stated, in part, "This policy shall not apply to liability arising out of the rendering of or failure to render professional services . . . ."  Some of the underlying allegations were unconnected to the exercise of any specialized knowledge or intellectual skill. Therefore, these allegations did not clearly and unambiguously fall within the scope of the exclusion.

   Finally, the court agreed to stay the coverage action, other than allowing some limited discovery by Nautilus to take place. The duty to indemnify relied on litigated facts. It was therefore premature to rule on the insurer's duty to indemnify while the underlying action was pending.

Judge Posner Finds Exclusion Does Not Preclude Coverage for Injury to Construction Worker

   The Seventh Circuit found that an "Injury to Employees, Contractors, and Employees of Contractors" exclusion was not applicable to bar coverage for injuries to a construction worker. Atlantic Casualty Ins. Co. v. Paszko Masonry, Inc., 2013 U.S. App. LEXIS 11561 (7th Cir. June 7, 2013).

   The underlying plaintiff was an employee of a waterproofing company, Raincoat Solutions, which submitted a bid to the general contractor to perform caulking on the building being constructed. Before the bid was accepted, the general contractor asked for a demonstration. Raincoat brought the plaintiff to the job site to demonstrate caulking. When the plaintiff was finished, a beam supporting masonry equipment fell on him, causing injury. A half hour after the accident, Raincoat signed a subcontract for the caulking job. 

   The plaintiff sued the general contractor. The developer had secured a policy from Atlantic. The general contractor argued it was an additional insured under the policy. The district court found the "Injury to Employees, Contractors and Employees of Contractors" exclusion barred coverage, so no determination was made on the additional insured status of the general contractor. 

  The exclusion barred coverage for "bodily injury" to any contractor arising out of performing services by the contractor for which any insured may become liable. An expansive definition of contractor included any general contractor, developer, subcontractor and any persons "working for and/or providing services or materials of any kind for these persons." 

   The Seventh Circuit noted that when the underlying plaintiff was injured, his employer, Raincoat, either was a subcontractor or was providing services of any kind to a contractor, the plaintiff was a also  "contractor" under the exclusion because he was working for Raincoat. In such case, the accident would not be covered. 

   But the exclusion was ambiguous. The demonstration caulking could have been a "provision of services" either because the caulking remained on the windows or because the demonstration led to the signing of the contract. It was also possible, however, that "services" were not provided until the contractor began to do compensated work on the project. 

   Given the ambiguity, the court found that the underlying plaintiff was not a contractor when he was injured. Therefore, Atlantic had a duty to defend the general contractor if it was determined to be an additional insured.

   Thanks to Damon Key blogging colleague Robert Thomas (www.inversecondemnation.com) for sending this case my way.

Homeowner's Policy Does Not Cover Loss of Investment or Emotional Distress

   The Maine Supreme Court found a homeowner's policy did not cover damages for loss of investment, undisclosed physical problems with the property, and emotional distress. Langevin v. Allstate Ins. Co., 2013 LEXIS Me 54 (Me. June 4, 2013).

   The underlying plaintiffs sued the insured after purchasing his home for $315,000. The insured allegedly misrepresented the condition of the property and failed to disclose its prior use as a junkyard. The insured's policy with Allstate defined "bodily injury" as "physical harm to the body, including sickness or disease." Property damage was defined as "physical injury to or destruction of tangible property, including loss of its use." 

   Allstate refused to defend or indemnify the insured. The parties agreed to a judgment of $330,000 and the underlying plaintiff agreed not to execute the judgment against the insured. The judgment did not specify the basis of the insured's liability nor what damages the $330,000 award redressed. 

   The plaintiffs then sued Allstate. The trial court granted summary judgment to Allstate, finding there was no "property damage" and any damages for injury to the property did not arise from an "occurrence."

   The Maine Supreme Court affirmed. Damages for loss of investment did not constitute "property damage." Damages for undisclosed physical problems were not covered because the physical problems did not arise from an "occurrence" as alleged in the underlying complaint. The physical damage to the property resulted from its actual used as a junkyard, which, according to the underlying complaint, predated the insured's statements regarding the condition of the property. 

   Finally, allegations of emotional distress did not constitute "bodily injury" as defined in the Allstate policy. The underlying claims did not include any sort of bodily injury, physical harm, sickness or disease.