Insurance Law Hawaii

Coverage For Advertising Injury Barred by Prior Publication Exclusion

   The Ninth Circuit held that a claim for advertising injury was properly denied under the prior publication exclusion. Street Surfing, LLC v. Great Am. E&S Ins. Co., 2014 U.S. App. LEXIS 10737 (9th Cir. June 10, 2014).

   Street Surfing began selling a two-wheeled, inline skateboard called the "Wave" in December 2004. By 2007, Street Surfing also sold and advertised accessories for the Wave, such as "Lime Green Street Surfing Wheels for The Wave," and the "New Ultimate Street Surfer Wheel Set." 

   Rhyn Noll, who owned the registered trademark "Streetsurfer," sued Street Surfing in June 2008, claiming trademark infringement, unfair competition and unfair trade practices. Street Surfing had known that Noll owned the "Streetsurfer" trademark since early 2005. In September 2008, Street Surfing submitted a claim for coverage to Great American and tendered Noll's complaint.

   Great American denied the claim. The prior publication exclusion disclaimed coverage for advertising injury arising out of publication of material whose first publication took place before the beginning of the policy period. Great American's policies were in effect from August 2005 to September 2007.

   Street Surfing settled with Noll and then sued Great American. The parties filed cross-motions for summary judgment. The district court held that the prior publication exclusion relieved Great American of any duty to defend. Street Surfing appealed. 

   The Ninth Circuit affirmed. It looked at extrinsic evidence of undisputed facts which conclusively eliminated a potential for liability. Street Surfing affixed its logo to the Wave before the Great American policy period commenced in August 2005. This constituted a notice broadcast to the general public about goods for the purpose of attracting customers, meeting the policies' definition of an advertisement. Because the logo advertisement predated coverage and used the term "Street Surfing," which the underlying complaint alleged was a wrongful use of Noll's advertising idea, "Streetsurfer," the prior publication exclusion applied to any injuries arising from affixing the logo on the Wave during the coverage period.

   Further, Street Surfing's post-coverage advertisements were substantially similar to its pre-coverage advertisement. Therefore, the prior publication exclusion precluded coverage of the underlying action. 

   

Insurer's Motion in Limine to Dismiss Case for Lack of Expert Denied

   The court denied the insurer's motion in limine seeking to dismiss the insureds' complaint due to the absence of expert testimony. Fabozzi v. Lexington Ins. Co., 2014 U.S. Dist. LEXIS 74069 (E.D. N.Y. May 30, 2014).

   During the policy period, the insureds noticed their house had serious structural problems, including cracks in the walls and floors that were pitched toward the rear of the house. The insureds had to move from their house. When they submitted a claim, it was denied by Lexington because the losses were caused by "wear and tear, deterioration, earth movement, settlement, shrinking, bulging or expansion of the property leading to cracking of structural components."

   The insureds sued. Lexington filed a motion in limine to preclude the testimony of the insureds' expert and to dismiss the complaint for inability to offer prima facie proof of a covered loss absent such expert testimony. 

   It was the insureds' burden to show the policy covered the loss, i.e., that the loss resulted from a covered peril. The court determined, however, that it was not necessary to have expert testimony to establish the cause of the collapse. There were some instances that the cause of a building's collapse could be so apparent that no special knowledge was required, and lay testimony could be relied upon. 

   Liberty also contended that the insureds could not establish the damages without expert testimony. The insureds,  however, believed that they had suffered a total loss, and that they could prove the value of their loss without expert testimony. The court was not willing to hold, as a matter of law, that the prima facie damages required expert testimony.  

    Accordingly, Liberty's motion in limine seeking dismissal of the complaint was denied. 

   

No Coverage for Installation of Defective Steel Framing

   The California Court of Appeal affirmed the trial court's holding that the insurer had no duty to defend claims arising out of the insureds' installation of defective steel framing in an apartment building. Regional Steel Corp. v. Liberty Surplus Ins. Corp., No. B245961(Cal. Ct. App. May 16, 2014) [decision here].

   Regional Steel was a subcontractor for providing reinforced steel to the columns, walls, and floors of an apartment building under construction. Regional used 90 degree and 135 degree seismic hooks as approved by the general contractor, JSM Construction, Inc. The City building inspector issued a correction notice, however, requiring the exclusive use of the 135 degree hooks. Levels one through three had defective tie hooks and required repair. JSM refused to pay Regional's invoices and withheld $545,000. JSM had to make repairs that required opening up numerous locations in the concrete walls, welding reinforcements to the steel placed by Regional, and otherwise strengthening the inadequate installation.

   Regional sued JSM for the withheld payment. JSM cross-claimed, asserting breach of contract and breach of express and implied warranties. 

   Regional was an additional named insured under JSM's policy with Liberty. Liberty rejected Regional's tender of JSM's cross complaint, asserting there was no damage to property alleged. Further, the tie hook problem did not constitute an "occurrence" because the alleged damage was not caused by an accident.

   Regional sued Liberty. Regional contended that JSM asserted claims for damage to property and loss of use of tangible property based on JSM's allegations that it needed to repair damage to the garage by opening walls and floors to install support columns, which was "other property." Therefore, this case was distinguishable from F&H Constr. v. ITT Hartford Ins. Co., 118 Cal. App. 4th 364 (2004), which held that to bring defective construction within the insuring clause, the "damage" must be damage to property other than the property upon which the insured had worked.

   The trial court granted summary judgment to Liberty. JSM only alleged facts arising out of the damage caused by the defective seismic hooks and did not allege any facts of any other damages attributable to Regional. 

   The Court of Appeals affirmed. The court was aware of a prior holding that installation of the insured's asbestos material constituted physical injury to the building, even before any release of asbestos fibers. See Armstrong World Industries, Inc. v. Aetna Cas. & Surety Co., 45 Cal. App. 4th 1 (1996). Armstrong, however, noted the difference between the case before it (involving hazardous materials) and cases involving defective construction. California cases consistently held that coverage did not exist where the only property "damage" was the defective construction, and damage to other property had not occurred.

   I do not agree with this reasoning. The court recognized that the faulty workmanship arose from an accident, i.e., Regional did not intentionally use the wrong tie hooks. Yet, the court determined there was coverage only if the property damage occurred to portions of the project not worked on by Regional. A better analysis would be to recognize there was an "occurrence" that caused property damage. Such property damage would be covered, however, only if the business risk exclusion hurdles could be cleared. See e.g., Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W. 2d 65, 76 (Wis. 2004). 

   

Construction Defects Are Not An Occurrence Under New York, New Jersey Law

   The New York Supreme Court, Appellate Division, determined there was no coverage for construction defects under New York or New Jersey law. Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Turner Constr. Co., 2014 N.Y. App. Div. LEXIS 3546 (N.Y. App. Div. May 15, 2014).

   The property owner retained Turner Construction to serve as the general contractor. Turner subcontracted with Permasteelisa North America Corporation to design and build the exterior wall, a "curtain wall," which consisted of granite and glass. 

   A segment of the pipe rail system fell to the street from the eighth floor of the building. An investigation  determined that more than 20% of the pipe rail connections surveyed did not conform to the building plans. Additional problems included inconsistencies in the method of rail attachment, bent brackets on the pipe rail system, cracked glass louvers, cracked glass panels, and water infiltration.

   The owner sued Turner and Permasteelisa in New Jersey Superior Court for breach of contract, breach of warranty, and negligence. Turner and Permasteelisa tendered to National Union, who agreed to defend under a reservation of rights. National Union filed suit in New York for a declaratory judgment that it had no coverage obligations and for reimbursement of defense costs. The lower court held there was no coverage under the policy and that National Union was entitled to reimbursement.

   On appeal, the court noted that New Jersey law applied. Under well-established New Jersey law, a CGL policy did not cover an accident of faulty workmanship but rather faulty workmanship which caused an accident. Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 796 (N.J. 1979). There was no "occurrence" under a commercial general liability policy where faulty construction only damaged the insured's own work. Further, faulty workmanship by subcontractors hired by the insured did not constitute property damage under a CGL policy issued to the general contractor since the entire project was the general contractor's work.

   The court refused to follow the growing trend in other states that have recognized that faulty work may be treated as an "occurrence." Therefore, New York and New Jersey are aligned with the Hawaii Intermediate Court of Appeals' decision in Group Builders v. Admiral Ins., 123 Haw. 142 (Haw Ct. App. 2010), which held that construction defects arise from a breach of contract, not an "occurrence."

   The New York court further noted that New Jersey law permitted reimbursement of defense costs of claims later determined not to be covered. However, National Union's policy included an endorsement which read, "This policy is primary coverage and the insurance carrier agrees not to take action or recourse against any insured for loss paid or expenses incurred because of any claims made against this policy." National Union argued the provision only precluded it from seeking to recoup from its insured the cost of defending against covered claims. There was nothing in the provision, however, that differentiated between covered and uncovered claims. Therefore, reimbursement of defense costs sought by the insurer was unambiguously precluded by the policy. 

Insurer Not Entitled to Summary Judgment Based Upon Vandalism Exclusion

  The court denied the insurer's motion for summary judgment on plaintiff's breach of contract claim because there was a disputed issue of fact regarding the applicability of the vandalism exclusion. Poole v. Untied Servs. Auto. Assn., 2014 N.Y. Misc. LEXIS 2394 (N.Y. Sup. Ct. May 16, 2014). 

   The plaintiff rented a residence to tenants. The tenants performed repairs to the residence which resulted in damage in excess of $126,000. The tenants vacated the residence. The plaintiff submitted a claim to USAA for benefits under her homeowners' policy. 

   USAA denied coverage based upon exclusions for damage caused by, among other things, faulty workmanship, renovation and remodeling. Plaintiff sued and USAA moved for summary judgment.

   The policy did not insure loss caused by vandalism if the dwelling had been vacant for more than 30 consecutive days. USAA's motion was denied because it failed to establish that pliantiff's loss resulted from a cause other than vandalism. Although the policy excluded for loss arising form inadequate renovations or workmanship, USAA failed to establish, as a matter of law, that the work done by the tenants, which allegedly was performed without plaintiff's permission, constituted renovations rather than mere vandalism. 

Bad Faith Claim Survives Insurer's Motion for Summary Judgment

   After the carrier was successful on summary judgment before the district court, the Ninth Circuit reversed, finding the causation and bad faith issues required a trial. Pyramid Tech., inc. v. Allied Public Adjuster, Inc., 2014 U.S. App. LEXIS 9210 (9th Cir. May 19, 2014).

   Pyramid purchased and resold electronic parts, many of which were  out-of-date or not state-of-the-art. Pyramid stored its inventory on shelves in a warehouse that did not have air conditioning or humidity control. Pyramid had approximately 52 million items in its warehouse at the time of a flood. 

   The warehouse was flooded with one to two inches of water on August 11, 2005. Condensation was visible on packages on the lower three to four shelves in the warehouse. Pyramid asked Hartford Casualty Insurance Company to test the inventory. Hartford's expert determined that the humidity did not reach a level that could have caused damage to any of he inventory. Hartford refused to test the inventory. It would have cost more than $13 million to test every item. 

   In August 2007, Hartford finally agreed to conduct limited testing of a small subset of parts identified by Pyramid as being damaged. Although some of the items were damaged, the Hartford expert determined that the flood was not the cause of corrosion damage to the parts he examined. In October 2010, Pyramid sold most of its undamaged inventory at a distress sale price of $125,000. 

   Pyramid sued for breach of contract and breach of the implied covenant of good faith. The district court granted summary judgment to Hartford.

   On appeal, Pyramid argued that Hartford breached the policy by failing to properly investigate and for denying the claim for loss of inventory. The Ninth Circuit noted that the inability to sell items due to physical damage would constitute a covered loss. A reasonable fact finder could conclude that some of the inventory items had moisture-related damage that diminished their market value. The diminution in market value was a recoverable measure of damages. Therefore, there was evidence from which a jury could determine that Pyramid suffered harm to its inventory.

   Regarding causation, there was evidence from which a jury could infer that moisture from the flood may have reached moisture-sensitive components because the packaging was not fully sealed, failed from age, or failed because the humidity caused by the flood reached above the dew point. Therefore, summary judgment was inappropriate against Pyramid's claim of loss of inventory. 

   Finally, there was evidence supporting an inference that Hartford acted unreasonably or with bias. It relied on its expert that humidity could not have caused damage, even though the expert conducted only a cursory investigation and relied on readings taken after the drying operation had concluded. Further, Hartford did not test any of Pyramid's inventory until two years after the flood and only after Pyramid had engaged its own expert. Therefore, summary judgment against Pyramid's claim for breach of the implied covenant of good faith was inappropriate. 

Excess Carrier's Declaratory Judgment Action Stayed While Underlying Case Still Pending

   The federal district court determined the excess carrier's declaratory judgment action to establish it had no coverage obligations should be stayed while the underlying case was still pending. Scottsdale Ins. Co. v. Ortiz & Assocs., 2014 U.S. Dist. LEXIS 64286 (D. Ore. May 9, 2014).

   The subcontractor's employee was killed on the job site when struck by a dump truck owned by the general contractor, Inland Asphalt Co. Island was sued for wrongful death. Island was an additional insured under the subcontractor's primary policy and excess policy with Scottsdale. 

   Inland put Scottsdale on notice of the underlying wrongful death lawsuit, but did not tender its defense to Scottsdale.

   While the underlying case was pending, Scottsdale initiated an action for declaratory judgment seeking a determination that there was no coverage. Scottsdale maintained that the auto liability exclusion in the excess policy precluded coverage for the underlying lawsuit. Inland moved to stay the coverage action until the underlying suit was resolved.

   The court granted Inland's motion. The declaratory action put Inland in a conflicting position while the underlying suit remained pending. To defend itself in the coverage action, Inland may have to argue it was negligent in providing treatment to the decedent in some other manner that fell outside Scottsdale's auto exclusion. This is the classic "Proscutean Dilemma" forewarned by the Hawaii Supreme Court in Dairy Road Partners v. Island Ins. Co., Ltd, 92 Haw. 398, 417, 992 P.2d 93, 112 (2000). Such a position would conflict with a denial of liability in the underlying suit.

   

Allegations Confirm Duty to Defend Construction Defect Claims

   Relying upon the same case cited by the Hawaii Supreme Court in its seminal decision on duty to defend, the federal district court determined the allegations sufficiently established a duty to defend construction defect claims. Voeller Constr. v. Southern-Owners Ins. Co., 2014 U.S. Dist. LEXIS 61862 (M. D. Fla. May 5, 2014).

   The Bay Harbor Clearwater Condominium Association, Inc. sued Voeller Construction for statutory breach of warranty and building code violations which allegedly caused damage to the condominium structure. The complaint alleged that the damage was unknown to the unit owners at the time they purchased their units. The project was completed in 2007. Expert reports attached to the complaint listed July 7, 2010, as the earliest date of discovery of the damage to the property. The CGL policies were effective from January 24, 2007 to May 9, 2009. Therefore, the insurer argued there was no coverage because the alleged "property damage" was discovered for more than one year after the policies expired. 

   The court determined there was a duty to defend. Citing Trizec Props., Inc. v. Biltmore Constr. Co., 767 F.2d 810 (11th Cir. 1985), the court noted that if the complaint alleged facts which created potential coverage under the policy, the duty to defend was triggered. The Hawaii Supreme Court relied on Trizec and made the same ruling in Dairy Road Partners v. Island Ins Co., Ltd., 92 Haw. 398, 412, 992 P.2d 93, 107 (2000). 

   The Florida Supreme Court had never decided whether the manifestation or injury-in-fact trigger applied when the date on which property damage commenced was unknown. The federal court decided injury-in-fact trigger was the appropriate theory for the occurrence based policy here because the policy was essentially the same as the policy considered under Trizec. 

   Because the allegations in the underlying complaint suggested that physical damage occurred at some point after the buildings were completed in 2007 and before the expert's inspection in 2010, and the insurer's policies were in effect during this time frame, the insurer had a duty to defend.

Employee Exclusion Bars Coverage for Wrongful Death of Subcontractor's Employee

   The Fifth Circuit determined the deceased was a statutory employee of the general contractor under Florida law, thereby barring coverage for the general contractor. Stephens v. Mid-Continent Casualty Co., 2014 WL 1623737 (11th Cir. April 24, 2014).

   The decedent fell from a ladder while working to install a modular home. Critically injured, he died on the way to the hospital. The decedent was an employee of Team Fritz, a subcontractor hired to set the modular home on its foundation. 

   The general contractor, Anchorage Homes LLC, had a liability policy with Mid-Continent. Damages relating to injuries to any of Anchorage's employees were excluded under the policy. Mid-Continent denied coverage contending that under Florida law, Team Fritz's employees were "statutory employees" of Anchorage. The law provided that the employees of a subcontractor were deemed to be employees of the contractor.

   Anchorage was sued by the decedent's family. The case settled for $4.35 million. Anchorage assigned its rights to coverage to the decedent's family. The family then sued Mid-Continent. The district court granted Mid-Continent's motion for summary judgment. The court held that the employee exclusion clause applied both to actual and statutory employees of Anchorage.

   The Fifth Circuit affirmed. There was no duty to indemnify, and, accordingly, no duty to defend. The court first determined that Team Fritz was Anchorage's subcontractor. Among other evidence, Anchorage entered into a written contract, the "Owner/Contractor Agreement," with the modular home owners. Team Fritz was hired to set the modular home according to the terms of the Owner/Contractor Agreement. Consequently, there was overwhelming evidence establishing that Anchorage was the general contractor on the project and was in a vertical contractor-subcontractor relationship with Team Fritz.

  The key to resolving the coverage issues was the Florida workman's compensation statute, making the employees of the subcontractor the employees of the contractor. Based upon this law, it was logical for the court to find the employee exclusion applied. Interestingly, Hawaii does not have similar provisions in its workers' compensation statutes, so this decision would likely not be relevant were a similar issue arise in Hawaii.