Insurance Law Hawaii

Limited Number of Insurance-Related Bills Passed by 2014 Hawaii Legislature

   Very few insurance-related bills survived the 2014 Hawaii Legislative session, with several consumer-friendly bills failing to make it out of committee.

   Here is a summary of the bills that passed:

   SB2365: Limits reimbursement of prescription medications in order to prevent drug prices from becoming an unreasonable cost driver of health care in workers' compensation and motor vehicle insurance claims. 

   SB2470: Appropriates general funds to provide for the sustainability of the Hawaii Health Connector, but provides for greater transparency, stakeholder engagement, and legislative involvement in the activities of the Hawaii Health Connector.

   SB2820: Amends Chapter 431, Hawaii Revised Statues, by adding a new section to article 10A prohibiting recession of coverage by a health insurer unless the individual is involved in fraud, makes an intentional misrepresentation, or fails to timely pay premiums.

   SB2821: Adopts revisions to the National Association of Insurance Commissioners' model laws on Credit for Reinsurance Model Act, Standard Valuation Law, Standard Non-forfeiture for Life Insurance, and Insurance Holding Company System Regulatory Act.

    All of these enacted bills have been enrolled to the governor who has until July 8, 2014 to sign or veto any bills before him, or to allow the bills to automatically become law without his signature. 

   Among the bills that died this legislative session were consumer friendly revisions to the Insurance Code, including HB2403. The bill would require an insurer in a first party claim to pay the claimant a fair amount within thirty days of a demand for payment of benefits under the policy. HB2048 also died. It would have clarified provisions by having surplus lines carriers pay the insured reasonable attorneys fees when coverage is denied and a court orders the insurer to pay benefits. Further, HB2048 would have provided for an award of reasonable attorney fees if an insurer was ordered to pay benefits in an arbitration. (Full disclosure - our office drafted HB2403). 

Disjointed Proof of Loss Sufficient

   The court found that when considered as a whole, separately filed proofs of loss  and estimates of damage were sufficient to meet the requirements of a flood policy. Young v. Imperial Fire & Cas. Ins. Co., 2014 U.S. Dist. LEXIS 51863 (April 15, 2014).

   On August 29, 2012, plaintiffs' property sustained flood damage due to Hurricane Isaac. After Imperial's adjustor inspected the property, advance payments were made for $5000 under the building coverage and $5000 under the contents coverage.

   On October 26, 2012, the plaintiffs' adjustor submitted a proof of loss for building damages, stating the amount of loss was $175,100, which was the policy limit minus the deductible. The insured wife signed the proof of loss. The actual case value, full cost of replacement or repair, and applicable depreciation were listed "undetermined." 

   A public adjustor retained by the plaintiffs sent an estimate of damage to Imperial on November 13, 2012. The total amount of damage was estimated to be $260,635.83.  The public adjustor sent another proof of loss to Imperial on November 16, 2012, stating it was a revised proof of loss. The claim was $175,100, which was the policy limit of building coverage minus the deductible. The proof of loss stated the full costs of repair or replacement was $260,235.83. The form stated the actual cost value and the applicable depreciation were undetermined.

   Imperial's adjustor issued his final report on November 19, 2012, recommending that Imperial pay plaintiffs $52,437.37 for damage to the building and $13,161.85 for contents. Imperial issued two checks to plaintiffs, one for $52,161.05 and the second for $8,161.85.

   On November 26, 2012, plaintiffs' adjustor submitted another proof of loss for building damages. The claim was for $175,100, which was the policy limit of building coverage minus the deductible. The proof of loss stated that the full cost of repair or replacement was $260,235.83. It again stated the actual cost value and applicable depreciation were undetermined. The form was dated and signed by plaintiff wife. 

   Imperial then informed plaintiffs that the proof of loss was rejected because it did not comply with the Standard Flood Insurance Policy (SFIP) requirements. Plaintiffs sued and Imperial filed for summary judgment. The court denied Imperial's motion.

   Although it was undisputed that plaintiffs submitted three signed, sworn proofs of loss for building damage with detailed estimates of damages, Imperial argued the submissions were inadequate because the detailed estimate was not submitted with a signed proof of loss form and the estimate was not separately signed and sworn by plaintiffs. 

   The court found that all of the plaintiffs' proof of loss forms, taken together with their adjustor's estimate, constituted a completed proof of loss that complied with the SFIP. The forms clearly stated that plaintiffs' cost of repair was $260,235.83, and the claim was policy limits on building coverage, minus the deductible, which was $175,100. 

Insurer's Denial of Coverage to Additional Insured Constitutes Bad Faith

   The insurer's unreasonable denial of a defense and indemnity to a lessor/additional insured was found to be in bad faith. Seaway Props. v. Fireman's Fund Ins. Co., 2014 U.S. Dist. LEXIS 55998 (W.D. Wash. April 22, 2014).

   Seaway leased restaurant space to Ciao Bella Food, LLC. In January 10, 2010, the underlying plaintiff was on her way to the restaurant when she attempted to step down from a concrete platform between the building parking lot and the entrance to the restaurant. Seaway's lease gave Ciao Bella the right to use the common areas, including the parking lot, but did not grant Ciao Bella exclusive control over the common areas. The plaintiff suffered injuries and claimed both Ciao Bella and Seaway were liable. 

   Seaway's lease required Ciao Bella to maintain a CGL policy and to name Seaway as an additional insured. Ciao Bella did so by securing a policy with Fireman's Fund. Fireman's Fund had notice of the plaintiff's claim by November 2010. Seaway demanded in March 2012 that Fireman's Fund indemnify and defend it. In September 2012, two years after it first learned of the plaintiff's injury, Fireman's Fund denied coverage, asserting that Seaway was not an insured under the policy. 

   Seaway and Ciao Bella settled with the underlying plaintiff. Seaway then sued Fireman's Fund for breach of the policy, bad faith, and violation of the Washington Consumer Protection Act. Fireman's Fund moved for summary judgment, contending Seaway was not an insured under the policy.

   The policy's "Blanket Additional Insured" endorsement amended the "Who Is An Insured" clause to include:

f. Any person or organization that you are required by a written insured contract to include as an insured, subject to all of the following provisions:

   (1) Coverage is limited to [the additional insured's] liability arising out of:

    (a) the ownership, maintenance or use of that part  of the premises owned by you,                   rented to, or leased to you. . .

 Fireman's Fund contended the Blanket Additional Insured clause gave additional insured status only to entities who met the preliminary requirements stated in the phrase in the "Who Is An Insured" clause," stating "as well as the additional limits on coverage.

    The court disagreed. The Blanket Additional Insured clause required only that a lessor like Seaway demonstrate both that it is a lessor to a named insured and that the lease requires the named insured to name the lessor as an additional insured. The provisions following the phrase "subject to all of the following provisions" were merely limitations on coverage afforded to a named insured. Each of the "provisions" that followed the phrase stated limits on "coverage," not on who was an insured. Therefore, Seaway was an additional insured.

   Fireman's Fund next argued that the accident did not "arise out of " the "use of that portion of the premises, or land owned by, rented to, or leased to" Ciao Bella. Washington law gave a broad scope to the phrase "arising out of" in an insurance policy. The underlying plaintiff was on her way to the restaurant. She therefore intended to use the part of the premises leased to Ciao Bella. Further, the Ninth Circuit had recently held in a case with similar facts that where a customer was on her way to a salon, it was enough to show that her injuries arose out of the use of the salon. Am. Economy Ins. Co. v.Zurich Am. Ins. Co., 534 Fed. Appx. 645 (9th Cir. 2013). This ruling dictated that the policy covered Seaway and that Fireman's Fund breached its duty to defend and indemnify. 

   Because Fireman's Fund interpretation of Seaway's status as an additional insured was unreasonable it was in bad faith. Fireman's Fund also violated Washington's Consumer Protection Act by failing to promptly respond to Seaway's tenders, to complete its investigation of a claim within thirty days, not providing a reasonable explanation of the basis for denying the claim. Most of these provisions under the Washington Consumer Protection Act are also found in the Hawaii Unfair Claim Settlmeent Practices Act, Haw. Rev. Stat. sec. 431:13-103 (a) (11). 

Policy's Operation Classification Found Ambiguous

   Property damage caused by a subcontractor's sheet piling was found to be within the policy's operation classification, which included "grading of land." Canal Indemn. Co. v. Margaretville of NSM, Inc., No. 13-13541 (11th Cir. April 15, 2014). [Decision here].

   Canal issued a CGL policy to the insured. The policy had a classification limitation provision:

This insurance applies to bodily injury, property damage, personal injury, advertising injury or medical expense arising out of only those operations that are classified and shown on the Commercial General Liability Coverage Declarations . . . 

The policy's Declarations, in turn, referred to the operation classification as" "Grading of Land - INCL. Borrowing, Filling or Back Filling." The policy did not define these terms.

   The insured was hired to do excavation work for the foundation of a building. While doing the excavation, the insured noticed the digging was creating a risk of harm to the adjacent property. Therefore, the insured installed sheet piling along the property line to prevent the excavation work from undermining the foundation of the adjacent property. The sheet piles that were placed in the ground were 19 to 20 feet in length. The sheet piling was installed using an excavator with a vibrating pile driver. 

   The adjacent property owner sued the insured for negligence in installing sheet pilings, which caused damage to its property. The complaint also alleged the insured breached its duty not to engage in activities which would cause damage to the adjacent property.

   The district court determined there was no coverage. The Eleventh Circuit, however, found the policy ambiguous as to whether sheet piling arose out of the operations of grading, filling, back filling, and borrowing such that sheet piling must be covered.

   The Dictionary of Architecture and Construction defined grading as "the action of excavating or filling or a combination thereof." The district court focused on its interpretation that grading was a "horizontal" activity, while sheet piling was a "vertical" activity, but the definition of grading included excavating, which was a vertical activity. Further, the underlying allegation that the insured breached its duty "not to engage in activities which would cause damage to Plaintiffs' property," could also arise out of grading, which the policy covered.

Following California Law, Federal Court AdoptsHorizontal Allocation For Asbestos Coverage

   Following California law, the federal district court adopted horizontal allocation to settle a dispute among carriers for an insured sued for selling asbestos products. New England Fire Ins. Corp. v. Ferguson Enterprises, Inc., Civil No. 3:12cv948 (D. Conn. April 8, 2014) [ruling here] 

   The insured was a California-based corporation that sold plumbing supply products that contained asbestos. The insured was named in numerous asbestos-related lawsuits that were filed largely in California. 

   The insured had primary and excess coverage for bodily injury claims. New England Fire Insurance issued an excess policy to the insured. The policy provided the insurer would be liable for the ultimate new loss in excess of the insureds underlying limit, which was defined as the amount equal to the limits of the underlying insurance, plus the applicable limits of any other underlying insurance collectible by the insured. 

   New England filed for a declaratory judgment against the other primary and excess insurers. New England argued it made payments beyond its obligations because one primary insurer's policy had not been exhausted through payment of claims.

   Several of the insurers argued New England's motion for summary judgment was improper because New England did not argue its own legal position with regard to whether horizontal or vertical exhaustion applied. The court noted that the determination of this dispute would resolve whether the excess insurers had an obligation to pay before or after the one remaining primary policy was exhausted. In continuous loss cases involving several primary policies and excess policies, the court had to determine whether the excess insurance was triggered after the limits of a specific underlying policy was exhausted (vertical exhaustion) or after all primary insurance policies were exhausted (horizontal exhaustion). Therefore, it was proper for the court to review the question of exhaustion. 

   California was the state where the insured risk was located and had the most significant relationship to the controversy. Applying California law, the court granted summary judgment and found that horizontal exhaustion applied to the policies at issue.

Occurrence Found, Business Risk Exclusions Do Not Bar Coverage for Construction Defects

   The court determined that the supplier of cement for the construction of pools had coverage for alleged construction defects in the finished pools. Harleysville Worcester Ins. Co. v. Paramount Concrete, Inc., 2014 U.S. Dist. LEXIS 43889 (D. Conn. March 31, 2014).

   R.I. Pools sued Paramount, a manufacturer and supplier of shotcrete, after cracking appeared in nineteen pools built by R.I. Pools using Paramount's shotcrete. The jury awarded R.I. Pools compensatory damages of $2,760,000. 

   Paramount's insurer, Harleysville, defended under a reservation of rights. After the verdict, Harleysville filed for a declaratory judgment that there was no coverage under the CGL policy. Paramount filed for partial summary judgment.

   Harleysville first argued there was no occurrence. The policy's definition of occurrence included the phrase, "continuous exposure." This broadened the term "occurrence" beyond the word accident to include a situation where damage occurred over a period of time, rather than suddenly or instantaneously. 

   Where the insured unintentionally sold a defective product that was incorporated into a third-party's finished product, the resulting impairment to the third-party's product was an "occurrence" that caused "property damage." The key factor was whether the insured's defective product caused physical damage to the larger product or system. 

   Here, the failure of the defective product caused harm to a larger system. The liquid shotcrete, once it dried, became inextricably intertwined with other components such as rebar and coping, which combined to create finished pools. The defective shotcrete, in turn, caused cracking that resulted in the failure of the pools. Therefore, the case fell within the category of defective component cases where courts have found an "occurrence" causing "property damage." 

   The court next considered numerous exclusions raised by Harleysville. Regarding the exclusion for expected and intended damage, it was not enough that the injury-producing act was intentional; the injury itself must have been intended by the insured. Nothing in the record indicated that paramount intended to do a shoddy job. But the jury did find Paramount was reckless. Therefore, Harleysville was entitled to present facts of recklessness to the jury in the coverage action.

   Nevertheless, none of the business risk exclusions relied upon by Harleysville were applicable. Exclusion k barred coverage for "property damage to 'your product' arising out of it or any part of it." The exclusion applied to damage to the insured's own product, but did not apply to damage caused by the insured's product to persons or property other than the insured's own product. Paramount's product was the shotcrete itself and not the larger pool into which it was incorporated. The damage that occurred was not to Paramount's product; the damage was caused by Paramount's product.

   Exclusion l barred from coverage "property damage to your work arising out of it or any part of it and included in the products-completed operations hazard." The "products-completed operations hazard" included damage "occurring away from premises you own or rent and arising out of your work," but excluded products that were still in the insured's possession and work that had not yet been completed. Here, Paramount's role was limited to mixing the shotcrete and delivering the product to the pool construction site. Harleysville contended Paramount's creation of the shotcrete was its "work," and this work was completed at the time Paramount delivered the shotcrete to the construction site. But by defining "your work" as "work" or "operations," Exclusion l appeared to related to services, not goods. If the defective shotcrete was Paramount's"work" as well as its "product," then Exclusion l did not bar coverage for the same reason that Exclusion k did not bar coverage: Paramount's shotcrete caused damage to the finished pools, not to its own product.

   Exclusion j (6) barred coverage for "that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." Exclusion j (6) did not apply, however, to "'property damage' included in the 'products-completed operations hazard'" - i.e., completed work not in the insured's possession. Paramount performed no work on the pools. Its work was complete when it delivered the shotcrete to the construction site. No property damage occurred until well after that time.

   Exclusion m eliminated coverage for "property damage" to "'impaired' property or property not physically injured that arose out of a "defect, deficiency, inadequacy or damaged condition in 'your product' or 'your work'". Exclusion m only applied to impaired property that could be restored to use through removal of the insured's defective product. It did not bar coverage in cases where the insured's defective product was inextricably incorporated into a finished product, such that it was impossible to remove the component from the whole.

   Exclusion n, the "sistership exclusion" applied to the "recall of products, work or impaired property." Here, there was no recall.

   Finally, Harleysville contended if there was coverage, the damage all flowed from one occurrence - the production of the faulty shotcrete. The court also disagreed. Paramount habitually manufactured defective shotcrete, but that shotcrete caused discrete harm each time its use in a pool caused the pool to crack and leak, thereby ruining the finished product it helped to hold together. Therefore, there were nineteen separate occurrences. 

Defense Owed to Directors and Officers Despite Insured vs. Insured Exclusion

   The court found there the duty to defend a suit filed by the FDIC against officers and directors was not excluded by the insured versus insured provision in the policy. W Holding Co., Inc. v. AIG Ins. Co. - Puerto Rico, 2014 U.S. App. LEXIS 5943 (1st Cir. March 31, 2014).

   Regulators ordered the closure of the insured bank and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver. FDIC concluded certain bank directors and officers had breached their fiduciary duty by jeopardizing the bank's financial soundness. The FDIC concluded these breaches had caused more than $367 million in losses and demanded reimbursement by the directors and officers.

   The directors and officers notified their insurer, Chartis, under the D&O policy. The policy paid defense costs. Chartis, however, denied coverage, relying primarily upon the "insured versus insured" exclusion. The exclusion  provided Chartis would not be liable for loss,

in connection with any claim made against any Insured which is brought by, on behalf of or in the right of, an Organization or any Insured Person other than an Employee of an Organization, in any respect and whether or not collusive.

Chartis maintained that the FDIC, as receiver, had stepped into the shoes of the bank. Any claims that FDIC had against the directors and officers were on behalf of the bank, triggering the insured versus insured exclusion.

   The bank sued for a declaratory judgment. The district court found that the insured versus insured exclusion barred the FDIC from suing on behalf of the bank's officers, directors and shareholders. But because the FDIC also sued on behalf of account holders and depositors, the judge concluded that the FDIC's claims fell outside the exclusion.

   The First Circuit affirmed. The FDIC alleged it had succeeded to the rights of the bank's depositors and account holders and was suing to recover money the FDIC-insurance fund had paid after the bank had shut down. These allegations made it likely possible - even if only remotely so- that the FDIC was suing on behalf of these non-insureds. 

Insured's Complaint Against Flood Insurer Survives Motion to Dismiss

   The insurer's attempt to dismiss the insured's multi-count complaint for failure to provide full coverage for flood damage failed. Ragusa Corp. v. Standard Fire Ins. Co., 2014 U.S. Dist. LEXIS 40812 (D. Conn. March 27, 2014).

   The insureds' house suffered significant damage due to flood associated with Hurricane Irene. The insureds submitted a claim. Standard Fire paid $35,216.75, well below what the insureds thought they were owed. The insureds returned the check and demanded what they believed was full payment. The insureds demanded an appraisal because the parties did not agree on the amount being paid under the policy, including disagreement about the amount owed for items that both sides agreed were covered under the policy. Standard Fire refused to participate in an appraisal. 

   The insureds ended up suing Standard Fire, alleging, among other things, breach of contract, negligent misrepresentation, and breach of the implied covenant of good faith and fair dealing. 

   Standard Fire argued the insureds' breach of contract claim failed because they did not submit a timely proof of loss. The timeliness of the proof of loss was unclear, and, consequently, this count could not be dismissed. 

   Standard Fire argued it was not obligated to submit to an appraisal because the procedure was not designed to address the scope of coverage. The insureds contended, however, that the parties did not agree on the amount to be paid. Because the court had to accept the insureds' well pleaded allegations, this count could not be dismissed.

   Finally, Standard Fire argued that extra-contractual claims were expressly preempted by federal law and barred by the Standard Flood Insurance Policy. Where, however, the allegations involved actions by the insurer that were outside the scope of the Standard Flood Insurance Policy, such as issues of negligence, the public treasury would not have to reimburse the insurance company. Therefore, the allegations survived Standard Fire's motion to dismiss.