Insurance Law Hawaii

Duty to Defend Claims Related to Hurricane Damage Despite Property Damage Exclusion

   The District Court determined there was a duty to defend directors under a Not for Profit Organizations insurance policy in one of three lawsuits filed against the insureds. Landing Council of Co-Owners v. Fed. Ins. Co., 2013 U.S. Dist. LEXIS 127989 (S.D. Tex. Sept. 9, 2013).

   The Council was a homeowners' association for "The Landing." Federal issued its Not for Profit Organizations insurance policy to the Council. The policy included directors and officers liability and entity liability coverage.

   The Landing was damaged during Hurricane Ike on September 9, 2008. The Council's Board scheduled a special meeting and vote for October 10, 2009, to determine the extent of the damage from the hurricane. On October 5, 2009, a group of "Concerned Owners" sent the Council a demand letter, which objected to the special meeting. The Concerned Owners contended that the Landing's declarations required that this type of special meeting be called within 40 days after the damage to the condominiums, and that deadline was long since passed.

   When the Council refused to cancel the meeting, three different lawsuits were filed against the Council. The first suit alleged the Council was negligent in failing to prepare for Hurricane Ike and in cleaning up and repairing the property after the hurricane. The second suit asserted claims for negligence in failing to prepare for the hurricane, failing to repair structures, and wasting assets after the hurricane rather than spending them to repair structures. In amended pleadings, gross negligence, breach of fiduciary duty and breach of contract were alleged. Finally, the third suit sought damages for the diminution in value of property and loss of rental income.

   The Council requested coverage for the three lawsuits. Federal denied coverage based on the Property Damage Exclusion which excluded coverage for any claims "based upon, arise from or are in consequence of any . . . damage to or destruction of any tangible property." 

   The Council sued and Federal moved for summary judgment, arguing that coverage for each of the underlying suits was barred under the Property Damage Exclusion. The Council argued that the exclusion did not apply to some of the underlying claims because the causation between the property damage and the underlying claims was too attenuated.

   The District Court analyzed the cases claim by claim to determine if the Property Damage Exclusion precluded coverage. While most of the allegations regarding breach of fiduciary duty arose because of the hurricane, if the Board failed to collect assessments after the hurricane due to an undisclosed interest in selling the Landing, this claim could have arisen independent of the hurricane. Therefore, a duty to defend this claim existed. 

   The breach of contract claims in the second suit for failure to collect assessments was not alleged to have arisen as a result of the property damage. Accordingly, there was a duty to defend this claim. 

   Regarding negligence, these claims related specifically to property damage occurring because of the hurricane and failure to clean up and repair the property. Consequently, these claims were subject to the Property Damage Exclusion. 

   The third suit's claim that the Council did not exercise reasonable care to preserve the value of the property arose from property damage related to the hurricane and was excluded. Therefore, there was no duty to defend this claim.

Claims against Insurance Agent Survive on Appeal

   The Sixth Circuit reversed the district court's denial of the insured's claims against an agent for failure to procure proper coverage. Cleveland Indians Baseball Co., L.P. v. New Hampshire Ins. Co. Group, 2013 U.S. App. LEXIS 17629 (6th Cir. Aug. 23, 2013). 

   The Cleveland Indians contracted with National Pastime Sports to put on "Kids Fun Day." As part of the entertainment, National Pastime agreed to provide an inflatable slide. National Pastime was also required to purchase a CGL policy naming the Cleveland Indians as an additional insured. CSI Insurance Group was engaged to procure the policy. The application for coverage indicated a bounce house or inflatable would be part of the entertainment. 

   CSI secured a policy from New Hampshire Insurance Company. The Cleveland Indians were named as a Certificate Holder in the policy.

    Tragically, during the festivities, the slide collapsed and killed an individual. Neither National Pastime nor the Indians had received a copy of the full policy at the time of the accident. 

   When National Pastime notified CSI about the accident, it was learned that CSI had mistakenly failed to procure a CGL policy that expressly covered inflatables. Instead, the policy that was issued excluded inflatables. 

   Suit for declaratory relief was filed by New Hampshire Insurance. The Indians filed a counterclaim and a complaint against CSI for negligence in failing to procure the requested insurance. CSI moved for summary judgment and the district court granted the motion. 

   The Sixth Circuit reversed. Under Michigan law, an independent duty of care was to be exercised by providers of professional services, including insurance brokers, towards third parties where the harm was foreseeable and where the defendant had specific knowledge that its actions might harm a specific third party. Here, it was reasonably foreseeable that an additional insured such as the Indians would be harmed if an insurance agency failed to procure the intended coverage, just as the primary insured would be. CSI knew that it was procuring insurance for the Indians, it knew exactly what dates and events the insurance was for, and it knew that a Certificate of Insurance had been issued to the Indians indicating that the policy was in effect. 

   CSI argued there must be some additional "special relationship" that would make it liable to the Indians. Such a relationship existed here. Therefore, the Indians had adequately stated a negligence claim against CSI. 

   Regarding the claim for negligent misrepresentation, the Indians reasonably relied on the Certificate as a representation by CSI that it had procured the requested policy. Therefore, the matter was remanded to the district court with instructions that the negligent misrepresentation claim proceed along with the general negligence claim.

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

Flood Coverage Case Remanded for Procurement Claim Against Insurer

   The United States District Court in Mississippi determined a case against the flood insurer involving procurement claims were properly remanded to the state court after it had been removed to federal court. Simmons v. Miss. Farm Bureau Cas. Ins. Co., 2013 U.S. Dist. LEXIS 105932 (N.D. Miss. July 29, 2013).

   The insured homeowners filed a complaint to recover for defendant insurer's alleged misrepresentations and failure to procure a flood insurance policy that would have covered flood damage to Plaintiffs' property. The Write Your Own carrier removed the case to federal district court. There was no diversity jurisdiction, so the court considered whether it had subject matter jurisdiction based upon federal question jurisdiction. 

   Plaintiffs alleged they were not seeking coverage under the Standard Flood Insurance Policy (SFIP) issued by the insurer or recovery on the basis of a contract from National Flood Insurance Program funds, but were instead seeking tort damage from their insurance agent's own funds and/or its errors and omissions coverage for the agent's tortious conduct in failing to procure the specific coverage explicitly requested and represented to have been procured. 

   Plaintiffs alleged they had a longstanding fiduciary relationship with the insurer and its agent. Plaintiffs sought flood insurance from the insurer and its agent on property they were about to purchase. Plaintiffs submitted an application for the coverage and paid the premium payment to the insurer's agent. Plaintiffs' property then suffered flooding during Hurricane Katrina. Only after the flooding occurred did Plaintiffs receive a copy of the policy. 

   Coverage was denied because an exclusion barred coverage for a flood already in progress at the time the policy terms began. 

   Plaintiffs did not seek recovery for any denial of coverage, but rather for the conduct of the insurer in the representations made about the policy and in the procurement of the policy. Such procurement-related claims sounded in state law. Therefore, the court found that Plaintiffs' complaint did not present a federal question claim, but instead presented state-law tort claims that fell within the procurement-related SFIP claims not preempted by federal law, as the claims alleged negligence on the part of the insurer.

Insurer's Summary Judgment Motion To Bar Coverage Denied Based Upon Ensuing Loss Provision

   The insurer's motion for summary judgment to deny coverage for the homeowners' fuel oil leak was rejected based upon the policy's ensuing loss provision. Estate of Konell v. Allied Prop. & Cas. Ins. Co., 2013 U.S. Dist. LEXIS 101081 (D. Ore. July 19, 2013).

   The insured argued that a windstorm caused a fuel oil leak from a line to the furnace which had been temporarily disconnected for repair and not capped. Damage caused by windstorm was covered. Damage caused by faulty workmanship was excluded. Finally, discharge of pollutants was not a covered peril. Nevertheless, an exception to the exclusion stated that pollution "caused by a Peril Insured Against," which included "windstorm," was covered. 

   Further, an exception to the faulty workmanship exclusion provided that "any ensuing loss to property [described above and not excluded] is covered."  The insured argued that the windstorm occurred after the faulty workmanship and, thus, was an ensuing cause of the loss.

    The insurer responded that under the facts presented, there were not two separate but contributing perils to one loss, as required for an ensuing loss. Instead, a windstorm was the only way in which pollution damage could fall within a potentially covered loss in the first instance. Therefore, coverage was excluded for a loss caused in part by a listed exclusion (faulty workmanship), even though the ensuing loss provision provided coverage for that same loss if caused in part by a covered peril (windstorm). 

   The federal district court found no Oregon law on how to apply the ensuing loss exception to the faulty workmanship exclusion in the policy. Therefore, the court relied upon the wording of the policy.

    The ensuing loss exception to the faulty workmanship exclusion was broadly worded by covering "any ensuing loss to property . . . not precluded."  Thus, a loss resulting from faulty workmanship was covered if it was caused by an otherwise covered event. Here the loss was caused by the escape of pollutants which was a covered peril if caused by a windstorm. The insureds argued the windstorm (covered peril) caused the disconnected fuel line (excluded peril) to leak, resulting in pollution damage (covered loss if caused by the covered peril of a windstorm) to the insured's residence. The court determined that Oregon would find the ensuing loss provision provided coverage for the loss. Otherwise, the ensuing loss exception to the faulty workmanship exclusion would be meaningless.

   Whether a windstorm caused the oil leakage was a disputed fact issue that barred summary judgment.

Short Primer on Insurance Coverage

   The Akamai Money section of yesterday's Honolulu Star-Advertiser published my short article on insurance coverage basics. The article is here.

Coverage Determined for Acquired Business Property In Storage

   The Eighth Circuit determined that business property in storage before the insured could transport the property was covered under the "Newly Acquired or Constructed Property" extension of the commercial property policy. Amera-Seiki Corp. v. The Cincinnati Ins. Co., 2013 U.S. App. LEXIS 14893 (8th Cir. July 23, 2013).

   The insured imported computerized industrial equipment for customers in the United States. It purchased a vertical lathe from a manufacturer in Taiwan for delivery to a customer in Illinois. The lathe was shipped to the Port of Los Angeles where it was stored in a terminal to await a flatbed truck to transport it to Illinois. The insured paid $1,950 to store the lathe at the terminal.

   Two weeks after arrival of the lathe, it fell off a tractor as it was being moved to a location from which it could be loaded onto the flatbed. The lathe was destroyed. A claim was filed with Cincinnati. Most of the claim was denied because Cincinnati deemed the coverage for newly acquired property did not apply. Only transportation coverage in the amount of $10,000 was paid under the policy. 

   The extension provided that if coverage existed for Business Personal Property, the insurance could be extended to cover loss to "Business personal property, including such property that you newly acquire, at any location you acquire other than at fairs, trade shows or exhibitions."

   The insured sued and motions for summary judgment were filed. The district court denied Cincinnati's motion and granted summary judgment to the insured.

   On appeal, the Eighth Circuit affirmed. The extension was ambiguous and had to be construed in favor of the insured. Cincinnati argued that the insured did not "acquire the terminal under the plain definition of "acquire" because it did not own, lease, possess or exercise control over the terminal. The temporary storage arrangements at the terminal were too passive and too transient to qualify the terminal as a location the insured had acquired under any reasonable interpretation of the newly acquired property extension. The insured, on the other hand, argued that the meaning of "acquire" was broader than Cincinnati contended. Having paid the storage fee to the terminal, the insured sufficiently got, obtained, possessed, and controlled - thus acquiring - the location at the terminal where the lathe was damaged. 

   Given the two competing definitions, the court found the extension of coverage to "any location you acquire" was ambiguous. Consequently, the extension was construed in the insured's favor.

Ninth Circuit Affirms Duty to Defend CERCLA Section 104 (e) Letter

   The Ninth Circuit held there is a duty to defend not only a PRP letter issued by the EPA, but also a section 104 (e) letter. Anderson Brothers, Inc. v. St. Paul Fire and Marine Ins. Co., 2013 U.S. App. LEXIS 18156 (9th Cir. Aug. 30, 2013). 

   The insured received two letters from the EPA notifying it of potential liability under CERCLA for environmental contamination of the Portland Harbor Superfund Site. The first letter was received in January 2008, and stated that the EPA sought the insured's cooperation in its investigation of the release of hazardous substances at the site. The letter enclosed an extensive, 82-question "Information Request" seeking information about the insured's current and former activities at the site. The letter informed the insured that its voluntary cooperation was sought, but compliance with the Information Request was required by law and failure to respond could result in an enforcement action and civil penalties of $32,500 per day. The insured tendered the 104 (e) letter to St. Paul and requested a defense and indemnity pursuant to the CGL policy. St. Paul declined to provide a defense because the letter did not constitute a "suit," which was required by the policy to trigger the duty to defend.

   The second letter from the EPA, received in November 2009, was entitled "General Notice Letter for the Portland Superfund Site" and notified the insured that it was a "potentially responsible party" ("PRP"). The letter further stated PRP's may be required to take action to clean up the Site as ordered by the EPA and to reimburse the EPA for its own expenditures in cleaning the site. Finally, the letter encouraged the insured to communicate with the other PRPs to work together to allocate the cleanup costs and work through intra-party issues. The General Notice letter was also tendered to the insurer, but St. Paul once again refused to provide a defense. 

   The insured sued St. Paul for breach of duty to defend. The district court granted the insured's motion for partial summary judgment, concluding that both letters triggered St. Paul's duty to defend.

   The 9th Circuit affirmed. A majority of courts held that a policyholder's receipt of a PRP notice from the EPA was the functional equvalent of a suit. The 9th Circuit had so held under Idaho law in Aetna Cas. & Sur. Co. v. Pintlar Corp. 948 F.2d 1507 (9th Cir. 1991). There was no reason to decide differently under Oregon law. Under an Oregon statute, any action by the EPA against an insured in which the EPA directed or requested that an insured take action was the equivalent of a suit. Both the 104 (e) letter and the General Notice Letter constituted "suits" within the meaning of this statute. 

   The court rejected St. Paul's argument that applying the Oregon statute to existing policies violated the contracts clause of the federal and state constitutions. Absent the statute, the court would construe the policies against St. Paul because Oregon common law had determined the word "suits" was ambiguous in the environmental context. 

   Thanks again to my Damon Key blogging colleague, Robert Thomas (www.inversecondemnation.com), for flagging this case.

Notice of Claim from Additional Insured Sufficient

   Notice of a claim from the additional insured was sufficient even though the named insured failed to give proper notice as required by the policy. Mt. Hawley Co. v. Robinette Demolition, Inc., 2013 Ill. App. LEXIS 499 (Ill. Ct. App. July 26, 2013).

   Robinette and Cobra Concrete Cutting Service, Inc. entered an ongoing subcontractor agreement under which Cobra would perform concrete cutting services for Robinette on future projects. Cobra was to defend, indemnify, and hold harmless Robinette and any other additional insureds identified in an attached Schedule B against all claims. Schedule B required Cobra to obtain a policy with an endorsement naming Robinette and any other parties "reasonably required by Robinette" as additional Insureds.

   Mt. Hawley issued a CGL policy to Cobra, requiring the named insured to notify Mt. Hawley of a claim or suit against any insured.

   Robinette sent Cobra a work order for a project. Robinette then received a certificate of insurance, adding itself and Valenti Builders, another subcontractor, as additional insureds.

   Thereafter, a Cobra employee, Richard Bucholz, was injured while working on the project. Bucholz filed suit agasint Robinette and Valenti Builders. Two years after the accident, but only two months after suit was filed, Robinette tendered its and Valenti's defense and indemnification to Mt. Hawley.

   Mt. Hawley denied coverage because the notice was too late. Mt. Hawley also determined that Valenti was not an additional insured because the Agreement did not require Cobra to add Valenti as an insured.

   Mt. Hawley filed a complaint for declaratory relief on the coverage issues. The parties filed cross motions for summary judgment. The trial court granted summary judgment to Mt. Hawley because Cobra had failed to give notice of the Bucholz suit.

   The appellate court reversed. Only Cobra, the named insured, had a duty to provide notice of an occurrence. There was nothing in the policy making coverage for the additional insureds contingent upon the named insured's compliance with its duty to notify.

   The appellate court also ruled that Valenti was an additional insured. Construed together, the Agreement, work order and certificate of insurance listing Valenti as an additional insured fulfilled the policy's written contract requirements even if Valenti's name did not appear in the Agreement. 

Contractor Covered for Voluntary Remediation Efforts in Completed Homes

   The Texas Supreme Court held that a home builder was covered for the voluntary removal and replacement of a defective insulation product it had installed in hundreds of homes. Lennar Corp. v. Market Am. Ins. Co., 2013 Tex. LEXIS 597 (Tex. Sup. Ct. Aug. 23, 2013). 

   Lennar built homes using an exterior insulation and finish system (EIFS). It was subsequently determined that EIFS trapped water inside homes with wood-frame walls, causing rot and structural damage, mildew and mold, and termite infestation. Lennar decided to contact all its homeowners and offer to remove the EIFS and replace it with conventional stucco. 

   Lennar notified its insurers that it would seek indemnification for the costs. The insurers refused to participate in Lennar's proactive efforts, preferring to wait and respond to homeowners' claims one by one. All insurers denied coverage and Lennar sued. The trial court entered summary judgment for all insurers, The court of appeals affirmed, except for Markel, which had provided a $25 million commercial umbrella policy, in effect from June 1, 1999 through October 19, 2000.

    On remand, Lennar and Markel tried the coverage case. After a jury trial, the court determined there was coverage and awarded $2.4 million to Lennar. The court of appeals reversed and rendered judgment for Markel. The court determined Lennar had not established its legal liability to the homeowners in order to trigger Markel's coverage. Further, Lennar had not offered evidence of damages covered by the policy. The policy covered only the cost of repairing home damage, not the cost of locating it. Because Lennar did not segregate the two, it was entitled to recover nothing. 

   The Texas Supreme Court reversed. The court rejected Markel's argument that Lennar's settlements were prejudicial because Lennar offered remediation to homeowners with damaged houses who would never have sought redress had Lennar left them alone. In other words, had Lennar stonewalled the homeowners, fewer repairs would have been made. This was a question of fact, not of law, which the jury resolved in Lennar's favor. Further, Markel failed to prove that it was prejudiced in any way by Lennar's settlements. Therefore, Lennar's loss as shown by the settlements was the amount Markel was obligated to pay under the policy.

      The only cost evidence Lennar presented at trial was to remove all of the EIFS from damaged houses, repairing the damage, and recovering the houses with conventional stucco. For some homes, removal of the EIFS revealed no damage. But for the homes that had some damage, Lennar did not segregate its cost to repair only the damage found; it included the cost of removing EIFS from the entire house to find all the damaged areas. Markel argued the court of appeals correctly found that the cost of determining the areas of water damage was not covered by the policy. 

   The Texas Supreme Court, however, found that the cost of finding EIFS property damage in order to repair it was "because of" the damage. Lennar could not have located all the damage, which was hidden from sight, without removing all the EIFS.

   Finally, Markel argued it was only responsible for the portion of the damage that occurred during its policy period. Coverage under Markel's policy was limited to property damage that occurred during the policy period, but expressly included damage from a continuous exposure to the same harmful conditions. For damage that occurred during the policy period, coverage extended to the "total amount" of loss suffered as a result, not just the loss incurred during the policy period. Thus, Lennar's total remediation costs was covered. Although Market argued, in the alternative, that it should be responsible with Lennar's other insurers only for its pro rata share of the remediation expenses, the Court had previously rejected this approach. 

Coverage Denied Under Flood Policy for Failure to File Proof of Loss

   The Court found coverage was properly denied due to the insured's failure to strictly comply with the requirements of the National Flood Insurance Act. Hughes v. Am. Nat'l Prop. & Cas. Co., 2013 U.S. Dist. LEXIS 99071 (E.D. La. July 16, 2013).

   The insured's home was damaged by Tropical Storm Lee in September 2011. The insured's policy was a Standard Flood Insurance Policy under the "Write Your Own" program with the insurer. 

   An adjuster was assigned to the claim and gave the insured a claims handbook, which included the requirements for proof loss. The total damage to be paid was $2,586.14. The adjuster sent a proof of loss to the insured for his signature, but never received the form back. The insured claimed he signed and returned the form along with eight documents. The insured also argued he met with the adjuster on numerous occasions at the property. Further, Exhibits 1-8, which included filled out worksheets of the losses, estimates, the NFIP "Final Report," photographs showing the damaged property and its repairs, and his contractor's estimate, were sent to the insurer and should constitute legal proof of loss. 

   The insurer closed the file without payment because a sworn proof of loss was never provided. The insured sued, and the insurer moved for summary judgment.

   The court granted the motion for summary judgment. Because an NFIP participant could not file a lawsuit without having complied with all policy requirements, summary judgment had to be granted if the insured failed to perform the legal obligations outlined in the regulations. These included sending the proof of loss within 60 days after the loss. The proof of loss was to include, among other things,the date and time of the loss, a brief explanation of how the loss happened, and an inventory of damaged personal property. 

   The documents submitted by the insured were not sworn statements. Because the information required by the proof of loss provision were not supplied, no rational trier of fact could find that he was entitled to receive payment for his SFIP claim.