Insurance Law Hawaii

Broker's Motion to Dismiss Negligent Misrepresentation Claims Is Denied

   Claims that an insurance broker misrepresented coverage survived a motion to dismiss in a case decided by the New Jersey federal district court. Danho v. Fidelity Nat. Indemn. Ins. Co., Civil Action No. 2:13-CV-04547 (D. N.J. Sept. 25, 2013). 

   The insured's home was covered under a flood policy issued by and through an insurance broker. Only one of two homes on the insured's lot was covered, however. 

   Hurricane Sandy caused severe damage and subsequent flooding to the home. Fidelity refused to provide coverage for damages sustained at the rear house located in the property. The insured contended that both the broker and Fidelity knew that the property consisted of two homes on a single parcel and were deemed two family, as evidenced on the declaration page of the policy. 

   The broker moved to dismiss the insured's state law negligent misrepresentation claim, arguing that the claim was preempted by the National Flood Insurance Act (NFIA). The broker contended that all disputes relating to claims under a flood policy were governed by flood insurance regulations issued by FEMA, the NFIA and by federal common law. 

   The court denied the motion to dismiss. The complaint alleged that the broker was aware that the property consisted of two homes on a single parcel and misrepresented to the insured that she was fully insured for the property in its entirety. Federal preemption did not apply in actions for tortious misrepresentation against flood carriers. While claims handling disputes were governed be federal law, a negligent misrepresentation claim sounded in tort and involved allegations of misrepresentations in the procurement of the policy, not in the adjustment of a claim under the policy. 

   The denial of the broker's motion to dismiss was without prejudice to raise the argument in the future if discovery revealed that the negligent misrepresentation  claim, although sounding in tort, involved interpretation of policy language. 

 

One Insurer's Settlement with Insured Does Not Bar Contribution Claim by Other Insurers

   The New Jersey Supreme Court held that one insurer could seek contribution from another insurer who settled with and secured a release from the insured. Potomac Ins. Co. v. Pennsylvania Manufacturers' Ass'n Ins. Co., 2013 N.J. LEXIS 847 (N.J. Sept. 16, 2013)

   The township of Evesham retained Roland Aristone, Inc. to be its general contractor for construction of a new middle school. After completion of the school, the roof leaked. Evesham sued Aristone for the construction defects.

   Aristone tendered to its various CGL carriers. Two insurers, Selective Way Insurance Company and OneBeacon Insurance Company, defended. Two others, Pennsylvania Manufacturers' Insurance Company (PMA) and Royal Insurance Company, denied coverage. Aristone sued PMA and Royal, and ultimately settled with PMA for $150,000 in exchange for Aristone's release from all claims, including claims for defense fees and costs.

   Shortly thereafter, Aristone settled with Evesham for $700,000. This included the $150,000 paid by PMA, $150,000 from OneBeacon, $260,000 from Selective, and $140,000 from Royal. OneBeacon then sought a portion of its defense costs from Royal and PMA. Royal settled with OneBeacon, but PMA argued its release from Aristone barred OneBeacon's claim. OneBeacon sued.

   The trial court found in OneBeacon's favor, recognizing a direct right of action by the insurer against its co-insurers for defense costs. The $700,000 settlement represented only indemnity payments. It apportioned defense costs using a pro rata formula, allocating sixteen percent of the defense costs to PMA. PMA's argument that its release from Aristone extinguished OneBeacon's contribution claim was rejected by the trial court. 

   The Appellate Division affirmed the decision allocating defense costs among the several insurers. 

   The Supreme Court affirmed, as well. The court's analysis relied upon its prior decision, Owens-Illinois, Inc. v. United Ins. Co., 650 A.2d 974 (1994). There, the court considered alternative methods for determining what constituted an "occurrence" and deciding which insurers must provide coverage in asbestos-related personal injury and property damage cases. The court adopted the "continuous trigger theory, under which progressive indivisible injury from exposure to injurious conditions was treated as a occurrence within each of the years of a CGL policy. The court then relied upon a pro rata formula of allocation, under which losses were allocated to the carriers on the basis of the extent of the risk assumed, i.e., proration on the basis of policy limits, multiplied by years of coverage.

   Following these principles, the trial court properly allocation sixteen percent of the defense costs to PMA.

   Further, the trial court and Appellate Division properly rejected PMA's contention that its release with Aristone barred OneBeacon's contribution claim. OneBeacon was not a party to the release and did not waive its right of contribution against PMA. 

Ensuing Loss Provision Bar's Insurer's Motion for Summary Judgment

   The court determined that the policy's ensuing loss provision prevented the insurer's motion for summary judgment on coverage for repair of an elevator. Lloyd's Acceptance Corp. v. Affiliated FM Ins. Co., 2013 U.S. Dist. LEXIS 130405 (E.D. Mo. Sept. 12, 2013).

   The insured managed an apartment building with four passenger elevators. After an inspection of the elevators, it was determined repairs were needed. One of the elevators was shut down so that replacement parts could be located and ordered. Steel suspension ropes on the other elevators had to be replaced.

   A claim for repair and replacement costs was submitted to the insurer under a California Standard Form Fire Insurance Policy. The insurer contended that the claim was based upon gradual deterioration, inherent vice, faulty workmanship, rust, corrosion, contamination, and electric and magnetic injury, all of which were excluded under the policy. 

   The insured filed suit and cross-motions for summary judgment were filed. The insured argued that the faulty workmanship exclusion applied to construction defects, but did not apply to negligent repair or maintenance of completed projects at issue here. Looking to the entire provision, the court noted that the phrases surrounding "faulty workmanship" related to defects that occurred before or during a construction activity. Therefore, the insured's motion for partial summary judgment was granted. 

   The insurer argued the claim did not fall under the ensuing loss exception to the exclusions. The policy had two sets of exclusions. The preface of the first set stated:

We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss . . . .

The preface of the second set read:

We will not pay for loss or damage caused by or resulting from any of the following perils; however, if loss or damage not excluded results, then the resulting damage is covered.

   The absence of the "regardless of" phrase in the second set implied that these exclusions applied only when they solely caused the loss. Otherwise, there would be coverage under the resulting loss provision in the preface. The insurer offered no argument that the breakdown of machinery or equipment did not cause the insured's loss, and thus failed to demonstrate that the claim fell within an exclusion. Therefore, the insured's motion for summary judgment was denied.

Alabama Supreme Court Finds No Coverage for Construction Defect to Contractor's own Product

   The Alabama Supreme Court followed prior precedent and found that the contractor's faulty workmanship causing damage to his own product did not arise from an occurrence. Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2013 Ala. LEXIS 122 (Ala. Sept. 20, 2013).

   The plaintiffs contracted with Carr to construct a new home. After completion of the home and taking occupancy, the plaintiffs noted several problems with the house related to water leaking through the roof, walls and floors, resulting in water damage to various areas of the house. The plaintiffs sued Carr and the case eventually went to arbitration. The arbitrator entered an award in favor of plaintiffs for $600,000. 

   Owners filed an action against Carr for a declaratory judgment seeking to establish there was no coverage because the property damage did not arise from an occurrence. The trial court granted summary judgment to Carr.

   The Alabama Supreme Court reversed. Under prior case law, faulty workmanship preformed as part of a construction project could lead to an occurrence if the faulty workmanship subjected personal property or other parts of the structure outside the scope of that construction project to continuous or repeated exposure to some other general harmful condition.

   Here the damage that resulted from poor workmanship was limited to damage to Carr's own product. Accordingly, there was no occurrence. 

   The Alabama Court did not rely upon any policy language in distinguishing between damage to the insured's project which it held did not constitute an occurrence, and damage to other property or other parts of the structure, which it agreed would constitute an occurrence. 

California Supreme Court Allows Claim Under Unfair Competition Statute To Proceed

   The California Supreme Court determined that insurance practices violating the state's Unfair Insurance Practices Act (UIPA) could support a claim under the state's unfair competition law (UCL). Zhang v. Superior Court, 57 Cal. 4th 353 (2013).

   Zhang purchased a CGL policy from California Capital Insurance Company. She sued California Capital in a dispute over coverage for fire damage to her commercial property. The complaint included causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the UCL. In her UCL claim, Zhang alleged that California Capital had "engaged in unfair, deceptive, untrue, and/or misleading advertising" by promising to provide timely coverage in the event of a compensable loss, when it had no intention of paying the true value of the insureds' covered claims. 

   Zhang specifically alleged unreasonable delays causing deterioration of her property; withholding of policy benefits; refusal to consider cost estimates; misinforming her as to the right to an appraisal; and falsely telling  her mortgage holder that she did not intend to repair the property, resulting in foreclosure proceedings.

   The trial court sustained California Capital's demurrer based upon a perceived bar against private actions for unfair insurance practices. The Court of Appeal reversed, holding Zhang's false advertising claim was a viable basis for her UCL cause of action.

   The Supreme Court affirmed the Court of Appeals. The UCL defined "unfair competition" as "any unlawful, unfair, or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." A private plaintiff could  bring a UCL action by showing economic injury caused by unfair competition. 

   The UIPA allowed only administrative enforcement by the Insurance Commissioner. Private UIPA actions were barred. A litigant could not rely on prohibited activities by insurers as set for in the UIPA as the basis for a UCL claim. However, when insurers violated both the UIPA and obligations imposed by other statutes or the common law, a UCL action could lie. The Legislature did not intend the UIPA to operate as a shield against any civil liability. 

   Hawaii also has an unfair competition law similar to California's. See Haw. Rev. Stat. 480-2. Claims under the Hawaii unfair competition law may only be pursued by "consumers," defined as natural persons. Haw. Rev. Stat. 480-1. The Ninth Circuit has predicted that the Hawaii Supreme Court would not find that the Insurance Code's unfair methods of competition would preempt suits against insurers for unfair trade practices in violation of section 480-2. Jenkins v. Commonwealth Land Title Ins. Co., 95 F.3d 791, 797 (9th Cir. 1996).  

Additional Insured Secures Defense Under Subcontractor's Policy

   The court determined there were sufficient allegations in the underlying complaint and third party complaints to raise a duty to defend for the additional insured. Ill. Emcasco Ins. Co. v. Waukegan Steel Sales, 2013 Ill. App. LEXIS 624 (Ill. Ct. App. Sept. 13, 2013).

   Waukegan was named as an additional insured under subcontractor I-MAXX Metalworks, Inc.'s policy with Emcasco. An employee of I-MAXX, John Walls, was injured on the job site and sued Waukegan. The complaint alleged Waukegan was negligent in failing to property manage, operate and maintain the premises. 

   I-MAXX had a policy with Emcasco which named Waukegan as an additional insured. The coverage was limited, however, to the additional insured's vicarious liability as a result of the insured's conduct. 

   Emcasco refused to defend Waukegan because the allegations of direct negligence against Waukegan were excluded by the vicariously liability provision. 

   Walls sued two other companies involved in the construction project, both of which filed third-party complaints against I-MAXX, alleging its negligence was the cause or contributed to Walls' injuries. Waukegan was not named as a party in these third-party complaints. 

   The trial court granted summary judgment to Waukegan, concluding that a duty to defend could be derived from the third-party complaints since they alleged direct negligence on the part of I-MAXX.

   On appeal, the Court of Appeals noted it was not restricted to the the allegations in Walls' complaint to determine whether there was a duty to defend. The court could also review the contract and third-party complaints.

    Reading Wall's complaint in conjunction with the third-party complaints demonstrated the potential for vicarious liability on the party of Waukegan. Walls alleged that Waukegan, "by and through its agents, servants and employees," was negligent. It then listed 12 allegations of negligence against Waukegan. The third-party complaints repeated the 12 allegations of negligence in seeking contribution from I-MAXX. Therefore, I-MAXX could have been one of the "agents, servants and employees" of Waukegan, which would expose Waukegan to vicarious liability. Consequently,the trial court correctly determined that Emcasco had a duty to defend Waukegan. 

South Carolina Supreme Court Finds that Consequential Damage Arise From "Occurrence"

   The South Carolina Supreme Court held that continuing damage that was part of a continuum of property damage constituted an "occurrence." Auto-Owners Ins. Co. v. Rhodes, 2013 S.C. LEXIS 248 (Sept. 25, 2013).

   Rhodes hired Eadon to design, fabricate, and erect three outdoor advertising signs on Rhodes' property bordering an interstate highway. After the signs were erected, one fell across the highway, blocking both lanes of southbound traffic. The state Department of Transportation ordered Rhodes to remove the remaining two signs and revoked Rhodes' permit to maintain signs on the property. 

   Rhodes sued Eaton. Eaton's insurer, Auto-Owners, filed a declaratory judgment action to determine whether there was coverage under the CGL policy. The trial court found the sign falling on the interstate constituted an "occurrence" that resulted in damages beyond the defective work to property other than the defective work itself. Further, the loss of use of the remaining two signs and the consequential damages flowing therefrom were causally linked to the sign that fell and also constituted property damage caused by an occurrence.

   The Court of Appeals affirmed. The South Carolina Supreme Court granted certiorari.

   Auto-Owners conceded that the falling of the first sign constituted an "occurrence." But the issue was whether the loss of the remaining two signs and the consequential damages were causally linked to the sign that fell, and thus constituted property damage caused by an occurrence. Prior case law held that defective construction resulting in damage to otherwise non-defective components could constitute "property damage," but the defective construction itself would not. 

   Here, the removal of the two additional signs mandated by the Department of Transportation was more tangential than the normal defective construction case where damage from faulty workmanship was obvious and directly related. 

   Nevertheless, the Court determined that the fallen sign and the removal of the remaining two signs was a continuum of an "occurrence." The existence of an "occurrence" from the removal of the remaining two signs would not have occurred but for the fallen sign as this accident precipitated the mandate issued by the Department of Transportation. Because the signs were simultaneously constructed, it was a single occurrence with progressive damage. 

Hawaii ICA Remands Case For Bad Faith Claim Against Health Insurer

   The Hawaii Intermediate Court of Appeals overruled the trial court's award of summary judgment to Hawaii Medical Service Association ("HMSA") on bad faith and emotional distress claims, and remanded the case for further proceedings. Adams v. Hawaii Medical Serv. Ass'n., No. 30314, Summary Disposition Order (Haw. Ct. App. Sept. 30, 2013) [here]. 

    The ICA noted that under Enoka v. AIG Hawaii Ins. Co., Inc., 109 Hawaii 537, 128 P.3d 850 (2006), the Supreme Court found there was no bad faith for the insurer's failure to investigate where the insured could not establish coverage. But a bad faith claim could arise from the insurer's bad faith mishandling of a claim, including unreasonable delay in deciding whether a claim was covered. 

   The insureds alleged that HMSA had delayed in denying their request for an "auto-allo tandem transplant" procedure. In response to HMSA's motion for summary judgment, the insureds presented a declaration depicting the insureds' numerous conversations with HMSA without adequate response being given and suddenly being notified that HMSA was denying the procedure. HMSA presented no evidence to the trial court that the insureds' request for the procedure was handled in a timely manner. Accordingly, the ICA could not say that, as a matter of law, the time HMSA it took to issue its denial was reasonable. 

   Further, the ICA could not say that, as a matter of law, the insureds did not present a prima facie case for the negligent and intentional emotional distress claims in opposition to HMSA's motion for summary judgment.

   Therefore, these portions of the judgment in favor of HMSA were vacated and remanded to the trial court. 

Lost Rent for Vandalized Building Recoverable Even Without Tenant

   The California Court of Appeal considered whether the insured building owner could recover for lost rent, even though it did not have a tenant, after its building was vandalized. Ventura Kester, LLC v. Folksamerica Reinsurance Co., 2013 Ca. Ct. App. LEXIS 723 (Cal. Ct. App. Sept. 11, 2013)

   Ventura owned a commercial building. Its tenant vacated the property in 2006. A lease proposal was presented to Ventura, but was rejected because of another arrangement being negotiated with Office Max. Ventura and OfficeMax executed a letter of intent to enter into a lease. But in May 2007, the building was vandalized, causing extensive damage. The cost of repair was estimated at $1 million. 

   In August 2007, OfficeMax declined to lease the property. Another potential tenant showed interest, but did not provide a sufficient letter of credit.

   The insurer paid $414,460 for repairs to the building. A construction company estimated that it would take up to a  year to repair the damage. The insurer denied the loss of rent claim because there was no signed lease at the time of the loss.

   The policy provided that the insurer would insure for financial loss resulting from "rents including accrued rents which become uncollectible . . . because of damage to or destruction of" the building. Elsewhere, the policy promised to pay "your net loss of rental income." 

   Ventura sued, alleging it was entitled to lost rent from May 2007 through July 2010, at a monthly rent of $100,000, for a total loss of rent of $3.8 million. The trial court found that the plain language of the policy did not provide coverage for lost rents when there was no tenant in the building. Summary judgment was granted to the insurer. 

   The Court of Appeal determined the lost rent provision was ambiguous, and the policy holder would have a reasonable expectation of coverage for rents that were actually lost as a result of property damage.

   The insurer argued that the provision for loss of rents should be interpreted narrowly to mean only rent from an existing tenant which is uncollectible as a result of damage to the covered property. The plain language of the policy did not limit recovery or calculate lost rents in this manner. The provisions provided coverage for the loss of rents the owner would have collected but for the property damage.

   A triable issue of fact existed, however, as to whether Ventura actually lost rents. There was insufficient evidence to establish as a matter of law that Ventura would not have rented the property during the time it took to adjust the claim and repair the damage.

   Therefore the judgment and order granting the insurer's motion for summary judgment were reversed. 

Hawaii Construction Defect Coverage Update

   Here is the powerpoint presentation I made for the Insurance Coverage Litigation Section at the Hawaii State Bar Association on Friday, September 27, 2013.