Insurance Law Hawaii

Factual Issues Prevent Summary Judgment Determination on Coverage for Additional Insured

   Numerous factual issues prevented the court from deciding at the summary judgment stage whether the additional insured was covered for a personal injury claim that happened on a construction site. Paynes Cranes v. Am States Ins. Co., 2014 U.S. Dist. LEXIS 40485 (E.D. N.Y. March 26, 2014).

   Intermetal Fabricators, Inc. hired Paynes to provide a crane and driver for the construction of a store. A construction worker was injured while working with the crane. The injured worker sued several defendants, including Paynes. 

   Intermetal had coverage for the project that included additional insureds. The policy provided,

Any person or organization . . . for whom you [Intermetal] are required by written contract, agreement or permit to provide insurance is an insured, subject to the following additional provisions:

a. The contract, agreement or permit must be in effect during the policy period . . . and must have been executed prior to the "bodily injury," "property damage," 'person and advertising injury." 

   Paynes sought coverage, but there was disagreement as to whether Paynes had a contractual agreement with Intermetal prior to the accident. Paynes argued that job tickets signed each day by the Paynes' employee at the job site was a contract. The reverse side of the job ticket stated that Intermetal agreed to partially indemnify Paynes, its employees and agents from claims for death or injury to persons arising out of Intermetal's operations.

   Paynes sued for a judicial determination as to whether it was entitled to coverage as an additional insured. American argued the job tickets did not create a valid contract because the person who signed the job tickets lacked the authority to enter into any contractual agreement on behalf of Intermetal.

   Cross motions for summary judgment were filed. The court determined whether the Intermetal employee had authority to bind his company by signing the job tickets was an issue for the trier of fact. Even if the individual lacked actual authority, questions of fact existed as to whether he could bind Intermetal under the doctrine of apparent authority. Further, disputes of material fact existed as to the employee's contractual intent at the time he signed the job tickets, whether the alleged contract was rendered invalid by a failure to include the price, and whether the circumstances gave rise to a duty of inquiry on behalf of Paynes.

Loss Ensuing from Faulty Workmanship Covered

   The court found coverage for damage resulting from faulty workmanship. Drury Co. v. Mo. United Sch. Ins. Counsel, 2014 Mo. App. LEXIS 319 (Mo. Ct. App. March 25, 2014). 

   The School District entered a contract with general contractor, Penzel Construction Company, Inc., to build an addition to a high school. Under the prime contract, the School District was to purchase property insurance, including builder's risk "all-risk" coverage. The policy was to cover the interests of the owner, the contractor, subcontractors and sub-subcontractors in the project.

   The School District obtained a policy from Missouri United School Insurance Counsel (MUSIC). Exclusions in the all-risk policy included loss due to faulty workmanship or materials, "unless loss by a peril not otherwise excluded ensues and then MUSIC shall be liable only for such ensuing loss." 

   Penzel entered a subcontract with Drury to install a roof deck made of Tectum. Drury began installing the Tectum on the project's roof. Rain and ice storms occurred over the next several months and the Tectum suffered moisture damage. Drury submitted the claim to MUSIC, which the claim denied based upon the faulty workmanship exclusion. 

   Drury sued MUSIC for breach of contract, among other claims. The trial court granted summary judgment to Drury, finding that regardless of MUSIC's assertion that the faulty workmanship exclusion applied, the trial court determined the loss was covered because the covered peril of rain ensued.

   The court of appeals affirmed. The policy covered damage to the Tectum resulting from "rain snow, or sleet." Although loss caused by faulty workmanship was excluded, MUSIC did not allege that Drury undertook deliberate damage-inducing actions. Because Drury sustained an ensuing loss from the precipitation, MUSIC was liable for the ensuing loss regardless of whether Drury's workmanship was faulty. 

Exclusion Does Not Bar Coverage for Injury To Subcontractor's Employee

   The Third Circuit reversed the district court and held that the additional insured was covered for injury to the subcontractor's employee despite an employee's exclusion in the policy. ArcelorMittal Plate, LLC v. Joule Technical Serv, Inc., 2014 U.S. App. LEXIS 2905 (3d Cir. Feb. 18, 2014).

   ArcelorMittal Plate, LLC (AMP) owned a steel production facility. AMP contracted with Joule, an industrial staffing and engineering firm, for regular performance of maintenance and repair work at its plant. Joule was obligated to provide a CGL policy adding AMP as an additional insured "for all claims including, but not limited to, claims by Joule's employees."

   Joule added AMP as an additional insured to its policy with Liberty Surplus Ins. Corp. The policy had an "employee exclusion" which stated,

This insurance does not apply to bodily injury to (1) an employee of the insured arising out of and in the course of (a) employment by the insured or (b) performing duties related to the conduct of the insured's business.

The policy also contained a severability clause, stating that,

This insurance applies: a. As if each Named Insured were the only named Insured; and b. Separately to each insured against whom claim is made or suit is brought. 

      In January 2008, several Joule employees were performing maintenance at the plant. While climbing down a ladder, William Green fell and seriously injured himself. Green and his wife later sued AMP. AMP sent a demand to Joule for defense and indemnification. Joule notified Liberty, who denied the claim.

   AMP then sued Liberty. The district court awarded summary judgment to Liberty and against AMP. 

   AMP appealed, arguing that the employee's exclusion did not bar coverage for a lawsuit brought by employees of a different insured on the same policy. In contrast, Liberty argued the employee exclusion barred coverage under the circumstances here.

   The Third Circuit determined New Jersey law applied and found there was coverage despite the exclusion. The reference in the employee exclusion was to "the insured" - not to "an insured" or "any insured." This was a specific, exclusive reference to a particular insured, rather than a general, inclusive reference to all insureds. Further, the severability clause meant that the reference to "the insured" in the employee exclusion referred to the insured making the claim, i.e., AMP, and only to AMP. Thus, the exclusions served to preclude coverage for a claim against AMP by one of its own employees, but not by a Joule employee.

Delay In Noticing Insurer of Loss is Not Prejudicial

   The Tenth Circuit reversed a district court's determination that untimely notice of the loss was prejudicial, eliminating the insurer's coverage obligations. B.S.C. Holding, Inc. v. Lexington Ins. Co., 2014 U.S. App. LEXIS 4492 (10th Cir. March 11, 2014).    

   In January 2008, the insured's employees detected an inflow of water in a salt mine and feared dissolution of the salt or structural problems. The insured tried to devise a solution. Two and a half million dollars were spent to find the cause of the water inflow and to identify a solution.  In April 2010, the insured determined the inflow was caused by an improperly sealed oil well. In July 2010, the insured notified Lexington of the water inflow. The ultimate proof of loss was for $7.5 million, which included remediation measures that the insured had performed before notifying Lexington. 

   Lexington's all-risk policy required the insured to notify the company in writing as soon as practicable.

   Lexington sued for a declaratory judgment. Lexington's motion for summary judgment argued the insured took too long to provide notice. The district court agreed. 

   The Tenth Circuit reversed. Because Lexington presented no evidence of actual prejudice, it was not entitled to summary judgment. Lexington could not demonstrate it was prejudiced by a lost opportunity to investigate before the insured began remediation. Lexington had independently inspected the mine and failed to prove how its investigation was hampered by the delay. Nor did Lexington adequately explain how its input on remediation efforts would have affected the efforts. Finally, Lexington failed to demonstrate how the delay prevented a meaningful evaluation of risk during underwriting of the renewal of policies.

Hawaii Business Magazine Recognizes Damon Key Blogs

   Hawaii Business magazine has published an article by Jon Letman, "Hawaii-Focused Legal Blogs," in the April 2014 edition. [article here].

    In addition to this blog, the article discusses blogs authored by Anna Oshiro focusing on Hawaiiconstructionlaw.com (construction litigation, arbitration, bonding, and licensing issues), Mark M. Murakami in Hawaiioceanlaw.com (maritime, Jones Act, navigation, etc.) and Robert H. Thomas at inversecondemnation.com (addressing land use and inverse condemnation issues).

    Thanks to Hawaii Business magazine and Jon Letman for recognizing our blogs.

Coverage Established for Property Damage Caused by Added Product

    Applying Minnesota law, the federal district court determined the supplier of contaminated dried milk had coverage. The Netherlands Ins. Co. v. Main Street Ingredients, LLC, 2014 WL 1012793 (8th Cir. March 18, 2014).

   In 2007, Plainview Milk Products sold dried milk to Main Street Ingredients, LLC, who then sold the dried milk to Malt-O-Meal. The dried milk was used by Malt-O-Meal in its instant oatmeal products.

   In June 2009, the FDA found Salmonella bacteria at Plainview's plant. The FDA also observed thirteen instances of insanitary conditions in the plant. Plainview issued a product recall notice announcing a "voluntary recall" of dried milk, stating its dried milk had "the potential to be contaminated with Salmonella." 

   Main Street forwarded the notice to Malt-O-Meal. As a result, Malt-O-Meal recalled its instant oatmeal that contained the recalled dried milk. 

    Malt-O-Meal then sued Main Street and Plainview. Main Street was insured under a CGL policy with Netherlands. Netherlands defended under a reservation of rights and then sued for a declaration that it had no duty to defend or indemnify Main Street. The district court granted Main Street's motion for partial summary judgment. The parties stipulated to entry of final judgment and the district court awarded $1.4 million, plus interest, to Main Street. Netherlands appealed.

   Netherlands argued it had no duty to indemnify because (1) the dried milk did not suffer "property damage," and (2) the sale of the dried milk to Malt-O-Meal was not an "occurrence." 

   Regarding "property damage," the parties agreed there was no finding that either the dried milk or the instant oatmeal contained Salmonella. Nevertheless, the district court found "property damage" was present because the instant oatmeal was physically affected, as it included instant milk that was manufactured in insanitary conditions. Testimony established the insanitary conditions in the Plainview plant. Further, the FDA voluntary recall of the dried milk was far reaching. Therefore, the district court found the incorporated instant oatmeal was physically affected because it included instant milk that was manufactured in insanitary condition. Under Minnesota law, this constituted "property damage" to the instant oatmeal.

     The district court also found the recall of the instant milk was an "occurrence" because there was no evidence that Main Street intended to injury Malt-O-Meal. Netherlands maintained that where there was failure to provide a product that complied with its contract or guarantees, there was no "accident." But Minnesota law established an "occurrence" could occur in a breach of contract context. The Eighth Circuit agreed that because Main Street did not intentionally sell to Malt-O-Meal FDA-condemnable dried milk, the sale of the dried milk was an "accident" which established an "occurrence." 

   Turning to the exclusions, the "your product" exclusion did not apply. Malt-O-Meal's instant oatmeal was not "your product" under the policy's definition because Main Street did not manufacture, sell, handle, distribute or dispose of Malt-O-Meal's instant oatmeal.

   Nor did the "impaired property" exclusion apply because the instant oatmeal could not "be restored to use." Second, the instant oatmeal was "physically injured."

   Consequently, the decision of the district court was affirmed.

   This case may have significance in disputes over coverage for construction defects and property damage. The decision found "property damage" in the instant oatmeal based on Salmonella that may or may not have been present. Therefore, a potentially damaged product merged into a completed project could constitute "physical injury to tangible property," i.e., "property damage." 

Claim Against Broker for Failure to Procure Adequate Coverage Survives Summary Judgment

   The broker's motion for summary judgment, seeking to dismiss negligence claims for failure to obtain adequate coverage, was denied by the court in Voss v. The Netherlands Ins. Co., 2014 N.Y. LEXIS 384 (N.Y. Ct. App. Feb. 25, 2014).

   The insured met with a representative of CH Insurance Brokerage Services Co., Inc. (CHI) to discuss coverage for the premises and her two companies. At CHI's request, the insured shared information on sales figures for calculating business interruption coverage. The broker represented that CHI would reassess and revisit the coverage needs as her business grew. 

   CHI recommended $75,000 per incident in coverage for business interruption losses. The insured questioned whether the $75,000 limit was adequate, but the broker assured her that it was sufficient. The insured then accepted the recommendation. Subsequently, the insured's business grew, but CHI renewed the policy with the same $75,000 business interruption limit.

   A loss occurred at the business premises when multiple leaks in the roof caused dripping water. The damage disrupted business operations. A new roof was put on the building, but it subsequently failed. Again, the insured's businesses were required to close for various periods of time. The insured was ultimately paid $3,197 for the first loss and $30,000 for the second loss. 

   In the next renewal of the policy, the business interruption limit was decreased to $30,000. The roof then failed for a third time, causing significant damage to the premises and further disrupting the insured's businesses. The insured sued CHI, the insurer, and the roofing contractor. The insured alleged that a special relationship existed with CHI and that CHI had negligently secured inadequate levels of business interruption insurance for all three losses.

   CHI moved for summary judgment, arguing that no special relationship was created. CHI's motion was granted and the complaint was dismissed.

   The Court of Appeals reversed. Generally, the insured could prevail in a negligence action where a particular request was made to the broker and the requested coverage was not procured. Here, however, the insured alleged there was a special relationship with the broker. If a special relationship existed, the broker could be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage. A duty of advisement could be created through a course of dealing over an extended period of time which would have put an objectively reasonable insurance agent on notice that their advise was being sought and specially relied on.

   Here, there was evidence suggesting some interaction regarding a question of business interruption coverage, with the insured relying on the expertise of the agent. Therefore, the complaint could not be dismissed on the basis that no special relationship arose between the parties.

Duty to Defend Negligent Misrepresentation Claim

   The Kansas Court of Appeals determined that the insurer must defend claims of negligent misrepresentation against its insured. Central Power Sys. & Servs. v. Universal Underwriters Ins. Co., 2014 Kan. App. LEXIS 9 (Kan. Ct. App. Feb. 21, 2014).

   Central Power contracted to furnish Eagle Well with 10 oil-rig engines and 10 oil-rig transmissions. Eagle Well alleged that Central Power informed them that the engines and transmissions would be operational without any additional components. As is turned out, the engines could not operate without a wiring harness. Eagle Well had to hire a third party to make wiring harnesses that would meet their needs and to install the wiring harnesses.

   Eagle Wells sued Central Power, alleging damages in the form of lost profits for the time it took to make the engines independently operational. Further, damages were incurred due to money needed for the costs of purchasing the wiring harnesses from the third party and attaching the harnesses to the engines. Claims asserted against Central Power included breach of contract, negligence and negligent misrepresentation. 

   Central Power tendered its defense to Zurich, who refused to defend or to indemnify. Central Power sued Zurich. The trial court concluded that Eagle Well's negligent-misrepresentation and negligence claims were covered by the policy. 

   The court of appeals affirmed. The loss of use of the engines qualified as an 'injury" under the policy. Zurich contended that Eagle Well suffered only economic losses, including lost profits from the inability to use the oil-well rights but no damage to the rigs themselves. Missouri law applied and purely economic damages resulting from the loss of use of tangible property had been found to constitute an injury.

   Further, there was an "occurrence" under the policy. The underlying allegations included negligence in the work performed and negligent misrepresentation regarding the work to be done. Missouri courts found that negligent misrepresentation claims were occurrences under CGL policies. Therefore, Zurich had a duty to defend.

Reversing Itself, Alabama Supreme Court Finds Construction Defect is An Occurrence

   The Alabama Supreme Court withdrew is prior opinion and authored a new decision finding that construction defects are an "occurrence." Owners Ins. Co. v. Jim Carr Homebuilder, No. 1120764 (Ala. March 28, 2014) [decision here].

   Jim Carr Homebuilder (JCH) contracted to build a home for the Johnsons. After completion of the construction and moving in, the Johnsons noticed several problems with the house, including water leaking through the roof, walls, and floors, resulting in water damage to those and other areas of the house. When JCH was unable to satisfactorily fix the problems, the Johnsons sued, alleging breach of contract, fraud, and negligence. 

    Owners, JCH's insurer, defended under a reservation of rights. The matter went to arbitration, where an award of $600,000 was made to the Johnsons. 

   Owners filed a declaratory judgment action against the Johnsons and JCH. Owners argued that the property damage upon which the award was based was not the result of an "occurrence." The trial court determined that the entire arbitration award was covered under the policy. 

   The Alabama Supreme Court first surveyed its prior decisions regarding coverage for construction defects. Prior decisions held that faulty workmanship itself was not an occurrence, but faulty workmanship could lead to an occurrence if it subjected personal property or other parts of the structure to "continuous or repeated exposure" to some other "general harmful condition." 

   In summarizing its prior cases, the court noted that faulty workmanship itself was not "property damage" "caused by" or "arising out of" an "occurrence." The cost of repairing or replacing faulty workmanship was not the intended object of a CGL policy issued to a contractor. But the fact that the cost of repairing or replacing faulty workmanship itself was not the intended object of the insurance policy did not mean that  additional damage to a contractor's work resulting from faulty workmanship might not properly be considered "property damage" "arising out of" an "occurrence." 

   The court also addressed the "your work" exclusion and whether it was included in the products-completed operations hazard. Generally, products that had left the insured's possession or work that was completed would be included in the hazard. Here, however, the products-completed operations hazard did not include property damage arising out of operations for which the classification, shown in the Declarations, stated that products-completed operations were included. JCH's policy indicated there was coverage for up to $2 million for products completed operations. Because the declarations showed coverage for products-completed operations, the "your work" exclusion did not apply. 

   Accordingly, the trial court's judgment was affirmed. 

Contingent Business Interruption Claim Denied

   The insured's claim for contingent business interruption ("CBI") coverage was denied in Millennium Inorganic Chemicals Ltd. v. Nat. Union Fire Ins. Co. of Pittsburgh Pa., 2014 U.S. App. LEXIS 3096 (4th Cir. Feb. 20, 2014).

   Millenium processed titanium dioxide, a compound used for its white pigmentation, at its plant in Western Australia. Millennium purchased natural gas to process the titanium dioxide from Alinta Sales Pty Ltd., a natural gas supplier. Alinta purchased gas from Apache Corporation. Once Apache processed the natural gas, it was injected into a pipeline. The gas from Apache's facility was commingled with that obtained from other producers, resulting in a mix of gas in a single pipeline. 

   Alinta had sole ownership of the gas once it entered the pipeline. Under Alinta's contract with Millennium, title to the gas passed to Millenium only at the time of delivery, i.e., when the gas left the pipeline and was delivered to Millennium's facility through a separate delivery line. Millennium had no contract or business relationship with Apache, and the contract it had with Alinta made no reference to Apache. 

   An explosion occurred at Apache's facility causing its natural gas production to cease. As a result, Millennium's gas supply was curtailed, and it was force to shut down its operations for a number of months. 

   Millennium's had property policies with National Union and Ace, including coverage for CBI loss. The CBI endorsement to the policies insured Millennium against certain losses resulting from the disruption of the supply of materials to Millennium caused by damage to certain "contributing properties." The endorsement provided coverage,

only against loss directly resulting from necessary interruption of business conducted on premises occupied by Millennium, caused by damage to or destruction of any of the real or personal property described above and referred to as CONTRIBUTING PROPERTY(IES) and which is not operated by Millennium, but the perils insured against during the term of this Policy, which wholly or partially prevents the delivery of materials to Millennium or to others for the account of Millennium and results directly in a necessary interruption of Millennium's business.

Millennium did not list any "contributing property" that created a risk of business interruption. Coverage was denied for the CBI loss because Apache was not a direct supplier to Millennium. 

   Millennium sued the insurers. The district court concluded that coverage extended only to "direct contributing properties." The court found that Apache was a "direct" supplier to Millennium and Apache's natural gas production facility was a "direct contributing property" within the meaning of the properties because Apache's facility physically provided a direct supply of natural gas to Millennium, despite the fact that Apache and Millennium had no direct contractual relationship. Judgement was entered for Millennium in the amount of $10,850,000. 

   The Fourth Circuit reversed. Neither Apache nor Apache's facilities had a direct physical relationship with Millennium. Whatever the relationship between Apache and Millennium, it was interrupted by "an intermediary," Alinta, who took full physical control of Apache's gas before delivering indistinguishable commingled gas to Millennium. Apache was only an indirect contributing property to Millennium, coverage of which was not included under the policy.