Insurance Law Hawaii

Allegations that Carrier Failed to Adequately Investigate Survive Demurrer

   The California Court of Appeal reversed the trial court's dismissal of a complaint alleging bad faith for the insurer's failure to adequately investigate the claim. Maslo v. Ameriprise Auto & Home Ins., 2014 Cal. App. LEXIS 564 (Cal. Ct. App. June 27, 2014).

   The insured was injured in an auto accident caused by an uninsured motorist. The insured sought policy limits of $250,000 from the insurer. In response, the insurer demanded arbitration. The arbitrator awarded $164,120.91.

  The insured sued, alleging the breach of the covenant of good faith and fair dealing. The First Amended Complaint (FAC) alleged the insured was not at fault. The police report found that the uninsured motorist was the sole cause of the accident. The insured provided the police report and medical records to the insurer. When the insured demanded the $250,000 policy limits, the insurer did not respond.

    The insurer later invoked arbitration. The insurer did not request a medical examination of the insured nor did it notice the depositions of the insured's treating physicians or interview them. The parties stipulated that the medical expenses totaled $64,120.91. The arbitrator awarded the insured $100,000 in general damages for a total award of $164,120.91. 

   The FAC further alleged that the insurer breached its duty of good faith and fair dealing by failing to negotiate a fair settlement before the arbitration, when the insurer had access to the police report and the insured's medical records.

   The trial court sustained the insurer's demurrer with leave to amend. The Second Amended Complaint (SAC) mirrored the FAC. This time, the court sustained the insurer's demurrer without leave to amend.

   Reversing, the Court of Appeal determined the SAC alleged facts sufficient to state a cause of action for breach of the covenant of good faith and fair dealing. The insurer rejected the claim without an adequate investigation. The insurer failed, among other things, to request a medical examination or interview the insured's treating physicians. Despite clear evidence of liability, the insurer made no offer of settlement. The insurer agreed to pay the claim only after the arbitration, which was more than three years after the accident and more than two years after the insurer had all the appropriate medical documentation in its possession. 

   While the insurer argued there was a genuine dispute as to coverage, this did not relieve an insurer from its obligation to thoroughly and fairly investigate, process and evaluate the insured's claim. A genuine dispute existed only where the insurer's position was maintained in good faith and on reasonable grounds. Allegations in the SAC that the insurer failed to comply with its common law and statutory obligations to thoroughly and fairly investigate, process and evaluate the insured's claim were sufficient to survive the insurer's demurrer. 

   

Coverage for Construction Defect Barred by Contractual-Liability Exclusion

   Relying upon precedent from the Texas Supreme Court, the Fifth Circuit upheld the District Court's denial of coverage based upon the policy's contractual-liability exclusion. Crownover v. Mid-Continent Cas. Co., 2014 U.S. App. LEXIS 12158 (5th Cir. June. 27, 2014). 

   The Crownovers entered a construction contract with Arrow Development, Inc. to construct a home. Paragraph 23.1 of the contract contained a warranty-to-repair clause, which provided Arrow "would correct work . . . failing to conform to the requirements of the Contract Documents." After the work was completed, cracks began to appear in the walls and foundation of the Crownovers' home. Additional problems with the heating, ventilation, and air conditioning system caused leaking in exterior lines and air ducts inside the home. 

   When Arrow refused to correct the problems, the Crownovers initiated arbitration. The arbitrator found that the Crownovers had a meritorious claim for breach of the express warranty to repair contained in paragraph 23.1 of the construction contract. Damages were awarded.

   Arrow filed for bankruptcy.The bankruptcy court allowed the Crownovers to pursue their claims against Mid-Continent. Suit was filed. The District Court granted summary judgment to the Mid-Continent based upon the contractual-liability exclusion. The exclusion stated that "this insurance does not apply to 'property damage' for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement." There was an exception to the exclusion for "liability . . . that the insured would have in the absence  of the contract or agreement." The district court noted that the arbitrator only ruled on the express warranty to repair contained in paragraph 23.1. The arbitrator declined to decide whether Arrow was liable to the Crownovers on any other ground. Therefore, the District Court held that because Arrow "became legally obligated to pay the arbitration damages on the basis of its contractually assumed liability," the contractual-liability exclusion applied with no applicable exception to the exclusion.

    The Crownovers argued the "implied warranty of good workmanship" continued to apply to the contract because there was no express disclaimer of the warranty. The District Court refused to adopt this argument, however.

    The Fifth Circuit affirmed. Two decisions from the Texas Supreme Court were controlling, Gilbert Texas Constr., L.P. v. Underwriters at Lloyd's London, 327 S.W. 3d 118 (Tex. 2010) and Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W. 3d 30 (Tex. 2014). 

   The arbitrator found that Arrow had breached the express warranty to repair contained in paragraph 23.1 of the contract. Drawing from Gilbert, the Fifth Circuit reasoned that while contractually agreeing to repair damage resulting from a failure to exercise reasonable care or agreeing to perform work in a good and workmanlike manner would mirror a contractor's duty under general law, contractually agreeing to repair damage resulting from a failure to comply with the requirements of the contract would not. 

   The Crownovers relied upon paragraph 14.4 of the contract, which stated that "the Contractor warrants that the Work will be free from defects not inherent in the quality required or permitted, and that the work will conform with the requirements of the Contract Documents." This provision, according to the Crownovers, was the equivalent to the implied warranty of workmanship that already existed under Texas law. Under Gilbert, the contractual-liability exclusion applied only if Arrow "assumed" a duty in its contract that it did not already have under the law. But paragraph 14.4 was not the basis for liability under the arbitration award. Rather, paragraph 23.1, which contained the "express warranty to repair," was the provision that the arbitrator decided Arrow had breached. Further, a builder could violate paragraph 14.4 by doing non-conforming work, but the failure to promptly correct such work as required by paragraph 23.1 was a separate violation of the contract.

   Consequently, the exclusion applied and the District Court was affirmed.

   As noted by Lee Shidolfsky, a Texas coverage lawyer on the forefront of these issues, the Fifth Circuit's finding that coverage would exist for contractually agreeing to repair damage resulting from a failure to exercise reasonable care in performing work, but would not exist for contractually agreeing to repair damage resulting from a failure to comply with the requirements of the construction contract, seems odd. Further, in Gilbert, the contractor contractually assumed liability to a third party by agreeing (on a strict liability basis) to repair third-party property damage. No such liability would have existed without such an agreement because the contractor had governmental immunity from such claims by third parties. So the facts in Gilbert were very different from what the Fifth Circuit considered here.

   We are informed that the Crownovers will seek a rehearing before the Fifth Circuit.

Unrelated Claims Against Architects Amount to Two Different Claims

   The Second Circuit found that two claims arising from the same project were unrelated, creating two separate payments by the insurer for the two separate claims. Dormitory Auth. of New York v. Continental Cas. Co., 2014 U.S. App. 12088 (2nd Cir. June 23, 2014).

   In 1995, the State agency contracted with the insured architectural firm to design and oversee the construction of a new dormitory at City University of New York. Plans drawn by the architects erred in their estimate of the steel requirement. To recover losses from the resulting delay and expense, the agency sent a demand letter in May 2002 to the architects detailing the Steel Girt Tolerance issue.

   After the project was finished in 2001, another problem was discovered: excess accumulations of snow and ice were sliding off the building onto sidewalks a considerable distance away. The Ice Control Issue was studied during the winter of 2003-04. The conclusion was that the design of the facade failed to account for temperature variations appropriate for a building in New York. The problem could not be resolved by adding canopies, which would have been a cheaper fix. Study of the problem continued into 2005.

   The architects' professional  liability policies were claims-made policies. Two policies were implicated: 2000-02 and 2003-04. The policies provided that "all related claims shall be considered a single claim first made and reported within the policy year in which the earliest of the related claims was first made and reported." "Related claims" were defined as "all claims made against the insured and reported to the insurer during the policy period during any policy year arising out of a single wrongful act or related wrongful acts."

   A settlement on the claims was reached as follows. Continental would pay the agency approximately $3.1 million under the 2000-02 policy for the claim made in the 2002 Demand Letter, i.e., the Steel Girt Tolerance Issue. Continental would pay an additional $3 million under the 2003-04 policy if the agency succeeded in obtaining a declaratory judgment that the Ice Control Issue was not related to the Steel Girt Tolerance Issue. 

   The district court ruled that the Ice Control Issue was not related to the Steel Girt Tolerance Issue and therefore entered judgment that Continental was to pay $3 million pursuant to the settlement agreement.

   Continental appealed. It argued that the 2002 Demand Letter alleged professional negligence in terms broad enough to include all design defects in the building,i.e., both the Steel Girt Tolerance Issue and the Ice Control Issue. The Second Circuit disagreed, finding that the letter only addressed the specifics of the Steel Girt Issue. It was not until the 2003-04 study was concluded that it became clear that major design changes would be needed. 

   Further, the Steel Girt Tolerance Issue and the Ice Control Issue were not "related claims." The claims arose from two unrelated, wrongful acts. One had to do with the structural integrity of the building. The other had to do with its aesthetic design. The solutions for each issue were wholly different. Therefore, Continental had to pay the two separate, unrelated claims. 

Power Point Presentation on Nautilus v. Lexington Case

     Here is our power point from today's presentation to the Hawaii State Bar Association's Litigation and Insurance Coverage Litigation sections. We discussed "other insurance" clauses as addressed by the Hawaii Supreme Court in Nautilus Ins. Co. v. Lexington Ins. Co., 132 Haw. 283, 321 P.3d 634 (2014).

"Other Insurance" Clauses to Be Discussed at Hawaii Bar Association Meeting

   On July 22, 2014, Richard Moser (Anderson Kill), Joseph Kotowski (Tom Petrus & Miller) and I (Damon Key Leong Kupchak Hastert) will make a joint presentation to the Litigation and Insurance Coverage Litigation sections of the Hawaii State Bar Association. We will discuss a recent decision issued by the Hawaii Supreme Court, Nautilus Ins. Co. v. Lexington Ins. Co., 132 Haw. 283, 321 P.3d 634 (2014). The decision addresses the impact of competing "other insurance" clauses in implicated policies and analyzes the process for sorting out which policy is primary and which is excess.

   The meeting will be held at the HSBA conference room from 12 to 1 p.m. on Tuesday, July 22. Hope to see you there.

Excess Policy Triggered Once Retention Paid, Even if Loss Not Covered By Excess

   The Fifth Circuit determined that the Umbrella policies took effect once the primary insurance was exhausted by claims not covered by the Umbrella policies. Indem. Ins. Co. of N. Am. v. W&T Offshore, 2014 U.S. App. LEXIS 11775 (5th Cir. June 23, 2014).

      W&T had primary and Umbrella/Excess coverage to protect its offshore oil rigs from hurricane damage. The primary policies covered property damage and third party claims. The Umbrella policies only covered third-party claims. All policies covered Removal of Debris (ROD). 

   In September 2008, Hurricane Ike caused damage to 150 offshore platforms in which W&T had an interest. W&T submitted over $150 million in claims for property damage to the primary carriers. The primary policies had a $10 million self-insured retention (SIR). The primary policies covered $150 million in coverage over the $10 million SIR. Anticipating that W&T would submit all of its ROD claims, which were estimated to exceed $50 million, the Umbrella carriers filed suit for a declaratory judgment.

   The Umbrella policies argued the SIR for the primary policies had not been exhausted. Instead, W&T exhausted its underlying policies, using claims that were not covered by the Umbrella policies (i.e., the $150 million of property damage claims). 

   The district court granted summary judgment to the Umbrella policies, finding that the underlying insurance could only be exhausted by claims that were also covered by the Umbrella policies. Because W&T exhausted the underlying policies with property damage claims, coverage under the Umbrella policies had not been triggered and there was no coverage for the ROD claims.

   The Fifth Circuit reversed. The insuring agreement in the Umbrella policies provided, "We will pay on behalf of the Insured those sums in excess of the Retained Limit . . ." Under this provision the Umbrella policies were obligated to pay "sums in excess of" the "total of the applicable limits of the underlying policies listed," i.e., sums in excess of the $161 million of the underlying coverage. 

   Elsewhere, the Umbrella policies provided that "when the underlying policies were exhausted by payment of claim to which this policy applies, we shall have the right and duty to defend any claim or suit covered by the policy." On the other hand, there was no explanation as to how the Retained Limit must be paid or that it must be met with claims covered under the Umbrella policies. The Umbrella policies simply stated that the Retained Limit must be met. There was no explanation about what would happen if the Retained Limit was exhausted by non-covered claims. 

   

Property Damage Caused By Construction Next Door Covered as Ensuing Loss

   Damage to the insureds' property caused by construction undertaken on the adjacent lot was covered under the insureds' property policy. Chubb Indem. Ins Co. v. 21 E. Cedar, 2014 U.S. Dist. LEXIS 79906 (N.D. Ill. June 12, 2014). 

   The insureds' home sustained damage contemporaneous with demolition, excavation, and construction taking place on a adjacent lot. Chubb paid benefits to the insureds for their loss, and then sought to recover as subrogee from the defendants who performed the construction.

   The defendants argued there was no coverage under Chubb's policy. Faulty planning, construction or maintenance were excluded. An exception to the exclusion stated, however, "we do insure ensuing covered loss unless another exclusion applies." Defendants argued characterizing the damages as ensuing losses was purely semantic and self-serving, designed to involve the ensuing loss provision in order to protect Chubb's coverage determination. Chubb contended the exclusion applied only to the specific property being insured and not to a neighbor's property where work is being performed. Therefore, the faulty construction exclusion did not apply and the ensuing loss provision was triggered. 

   The court agreed with Chubb. It was reasonable to interpret the exclusion as applying only to faulty construction related to the insured property. All-risk policies were intended to cover fortuitous losses, not brought about by an insured's own misconduct, unless the losses were expressly excluded. It would not make sense to exclude coverage for mishaps entirely outside of the insured's knowledge or control merely because they occurred as a result of a neighbor's construction project.

Hawaii Court of Appeals Affirms Broker's Liability for Failure to Renew Coverage

   The Hawaii Intermediate Court of Appeals affirmed the jury's finding that the broker was liable for failing to secure coverage for the insureds' home. Certain Underwriters at Lloyd's London v. Vreeken, 2014 Haw. App. LEXIS 322 (Haw. Ct. App. June 30, 2014).

   Based upon their dealings with the broker, the insureds thought they had coverage for their home from March 3, 2004 to March 3, 2005 and from May 9, 2005 to May 8, 2006. The house was elevated nine feet above the ground for structural renovation, but collapsed on May 23, 2005. The original policy had lapsed on March 3, 2005. The second policy was voided because the application prepared by the broker stated there was no renovation work underway on the property.

    The insureds sued. The jury found the broker and its agent liable for general, special and punitive damages. An appeal was filed. The ICA largely affirmed after addressing the many points raised on appeal.

    The broker first argued it had no agency relationship with the agent. The insureds testified that they visited the agent in the broker's office, made out the check for the premium to the broker, and the agent accepted the check. Therefore, the jury reasonably determined that the agent had apparent authority to act on behalf of the broker and that the broker was liable for the agent's actions. 

   The defendants argued they owed no duty to procure other insurance or to advise the insureds that the original policy had lapsed. An insurance agent, however, "owes a duty to the insured to exercise reasonable care, skill and diligence in carrying out the agent's duties in procuring insurance." Quality Furniture, Inc. v. Hay,, 61 Haw. 89, 93, 595 P.2d 1066, 1068 (1979). Here, when the insureds asked what needed to be done to make sure their policy continued in force, the agent told them "he would take care of it." When the agent learned the original policy would not be reinstated, neither he nor the broker notified the insureds that the policy had not been reinstated before the house collapsed two months later. The agent also concealed from the insureds that he had submitted a second application with a material misrepresentation that resulted in voiding the second policy. 

   Under these circumstances, it was the broker's duty to inform the insureds of the agent's failed attempt at reinstating th eoriginal policy and of the agnet's actions in seeking the second policy. The agent had taken on the responsibility of reinstating the policy, but the insureds were not aware that their home would not be covered.

   The defendants next argued that the insureds failed to present any evidence that they could have obtained insurance to cover the risk of collapse. The ICA held that the insureds were not required to demonstrate that alternative insurance was available as part of their prima facie case. Instead, the burden was on the defendants to show the unavailability of alternate insurance.

   The ICA also upheld the negligent misrepresentation claim. There was evidence from which the jury could conclude that the agent made the statement that "I'll take care of it" without sufficient intent that he would be able to renew the policy, despite the insureds' reliance on the renewal. 

   The ICA then considered the award of punitive damages. The jury awarded $10,000 in punitive damages against the agent and $450,000 against the broker. The evidence supported the jury's conclusion that the agent acted wantonly. But there was insufficient evidence that the broker authorized or ratified the agent's activities. The evidence at trial did not support an award of punitive damages against the broker. Therefore, this award was vacated.

   This is an important decision that brings Hawaii in line with other jurisdictions that hold insurance agents and brokers liable for failure to place adequate coverage, especially when there is a special or longstanding relationship with the insured. E.g., Troost v. Estate of DeBoer, 155 Cal. App. 3d 289 (Cal. Ct. App. 1984); Wachovia Ins. Serv., Inc. v. Toomey, 994 So.2d 980 (Fla. 2008). 

Insurer Must Defend Claims of Sexual Abuse

   The district court decision that a defense was owed for claims that included sexual abuse was affirmed by the First Circuit. Metropolitan Property and Cas. Ins. Co. v. McCarthy, 2014 U.S. App. LEXIS 10622 (1st Cir. June 5, 2014).

   The insured was sued when one of her wards allegedly sexually and physically abused a younger boy. The district court determined that Metropolitan had a duty to defend.

   The First Circuit affirmed. Metropolitan argued that the only abuse alleged in the underlying complaint was either sexual in nature or intended to conceal sexual abuse. Hence, the alleged action was excluded by the policy's definition of bodily injury. The complaint, however, included allegations of physical abuse that were not limited to physical contact related to sexual abuse. For example, it was alleged that the victim was "repeatedly sexually and otherwise physically abused." Elsewhere, the complaint alleged that the victim was "violently and forcefully struck" in the abdomen.

   Metropolitan also argued the abuse exclusion barred coverage. But the exclusion could be reasonably read to preclude coverage only for abuse inflicted or directed by an insured rather than by any individual. Otherwise, the provision was ambiguous. Therefore, the conduct of a non-insured individual was interpreted as outside the scope of the abuse exclusion. 

   The court next considered whether the allegations allowed the possibility that the perpetrator was a non-insured. "You" was defined as a person who was "a resident of the same household." The complaint established that the alleged abuser was a minor ward of the insured, but it did not state that he resided with her. Rather, the allegations could be interpreted to mean that the alleged abuser stayed only temporarily, though repeatedly, at the insured's home. Given this inference, the youth would be a non-insured whose conduct would be outside the abuse exclusion. 

   Accordingly, the complaint raised the possibility that the insured's ward was not a resident of her household and that he inflicted physical, non-sexual abuse on the younger boy. Under these facts, there was coverage and Metropolitan had a duty to defend.

No Duty to Defend Suit That Is Threatened Under Strict Liability Statute

   The Washington Court of Appeals found there was no duty to defend the insured under a strict liability statute for alleged contamination when no action was threatened by the agency. Gull Indus., Inc. v. State Farm Fire and Cas. Co., 2014 Wash. App. LEXIS 1338 (Wa. Ct. App. June 2, 2014).

   Gull leased a gas station to the Johnsons from 1972 to 1980. In 2005, Gull notified the Department of Ecology (DOE) that there had be a release of petroleum product at the station. DOE sent a letter acknowledging Gull's notice of suspected contamination. In 2009, Gull tendered its defense to its insurer, Transamerica Insurance Group. Gull also tendered its claims as an additional insured to the Johnson's insurer, State Farm. Neither insurer accepted the tenders.

   Gull then sued the insurers, arguing they had a duty to defend. Gull contended that because the state statute imposed strict liability, the duty to defend arose whether or not an agency had sent any communications about the statute or cleanup obligations. The insurers moved for partial summary judgment. The trial court ruled in favor of the insurers.

   On appeal, the court recognized that the Washington Supreme Court in Weyerhaeuser Co. v. Aetna Cas. & Surety Co., 874 P.2d 142 (Wa. Ct. App. 1994), found that the duty to indemnify may flow from strict liability. But there was no authority that supported a duty to defend when there was no issuance of communications about cleanup obligations.

   The court concluded that the undefined term "suit" in the policy was ambiguous in the environmental liability context and may include administrative enforcement acts that are the functional equivalent of a suit. But the court did not agree with Gull's contention that liability under the state statute alone, without any direct enforcement action by DOE, was the functional equivalent of a suit for the purposes of the duty to defend. Instead, an agency action had to be adversarial or coercive in nature in order to qualify as the functional equivalent of a "suit."

   Here, the DOE's letter acknowledging receipt of Gull's notice did not present a threat of immediate and severe consequences due to the contamination. Therefore, Gull did not meet its burden on summary judgment to establish there was the functional equivalent of a "suit" to trigger the duty to defend.