Insurance Law Hawaii

Pennsylvania Finds Policy Triggered When Property Damage Reasonably Apparent

   The Pennsylvania Supreme Court addressed when a liability policy was triggered for ongoing property damage. The Court also declined to apply the multiple trigger theory. Pennsylvania Nat'l Mut. Cas. Ins. Co. v. John, 2014 Pa. LEXIS 3313 (Pa. Dec. 15, 2014).

   In 2002, Appellants, co-owners of a dairy farm, expanded the size of their dairy herd and milking facility. Appellants hired LPH Plumbing to install a new plumbing system, which would include a wastewater drainage system and a separate freshwater drinking system. LPH Plumbing subcontracted with Stoltzfus Welding to weld metal pipes leading to a holding tank for the new freshwater drinking system. Construction was completed in July 2003. 

   Unknown to Appellants, the plumbing system was defective when dairy operations began. PVC piping for the wastewater was cracked, allowing "gray water" to escape. Further Stoltzfus failed to properly weld an intake pipe leading to a holding tank that formed a part of the freshwater drinking system for the dairy herd. Consequently, Appellants' herd was exposed to contaminated drinking water shortly after dairy operations began in July 2003. 

   As early as April 2004, the gray water contamination caused various health and reproductive problems with the dairy herd. Appellants consulted with various veterinarians and nutritionists to help diagnose and remedy the dairy herd's various maladies. Appellants finally began to suspect that the dairy herd's drinking supply was the cause of the problem when, in March 2006, the cows began thrashing their heads in their drinking troughs and refused to drink the water. Appellants then investigated and found the plumbing defects and the ongoing seepage of gray water into the dairy herd's drinking supply.

   Appellants sued LPH Plumbing and the Stoltzfus. LPH Plumbing was defended by Penn National, which had issued four policies to LPH Plumbing. The first covered from July 1, 2003 to July 2, 2004; the second from July 1, 2004 to July 1, 2005; and the third from July 1, 2005 to July 2, 2006. The fourth policy provided umbrella coverage for the period July 2, 2005 to July 2, 2006. Each policy carried a $1 million coverage limit.

   Appellants secured a jury verdict against LPH Plumbing and Stoltzfus for $3.5 million and $277,505.36 in delay damages. LPH appealed to the Superior Court. Through mediation, LPH Plumbing agreed to drop its appeal and Penn National agreed to pay $1.2 million to Appellants in exchange for waiver of all claims against LPH Plumbing. Appellants retained the right to seek the remainder of the $3.5 million judgment directly from Penn National.

   In a declaratory judgment action against LPH Plumbing, Penn National contended that only one policy was implicated, the policy for July 1, 2003 to July 1, 2004, when the injuries first manifested. Appellants sought a declaration that the two policies, the CGL and umbrella policies, in effect for the period July 1, 2005 to July 1, 2006, when the gray water contamination was discovered, were triggered. In the alternative, Appellants sought a declaration that LPH Plumbing's liability triggered each of the four CGL policies pursuant to a multiple trigger theory. 

   The trial court entered an order that Penn National was liable for paying the judgment against LPH Plumbing only under the CGL policy in effect for July 1, 2003 to July 1, 2004. The trial court concluded there was only a single occurrence, which happened when the effects of LPH Plumbng's negligence first manifested in April 2004 with the drop in milk production. The trial court also found the multiple trigger theory inapplicable because the Pennsylvania appellate courts had declined to apply the trigger outside of latent disease cases, like asbestosis.

   On appeal the Superior Court affirmed, finding Penn National liable only under the policy in effect from July 1, 2003 to July 1, 2004. The negligent installation of the plumbing system gave rise to only one occurrence in 2004. 

   The Pennsylvania Supreme Court, in turn, also affirmed. The court first rejected Appellants' contention that the application of the first manifestation rule for determining trigger of coverage required the cause of injury be known or reasonably discoverable. The policy language stated coverage was triggered when "'bodily injury' or 'property damage' occurs during the policy period." Coverage was therefore triggered when any of the following were reasonably ascertainable: physical injury to tangible property, loss of use of tangible property, bodily injury, sickness, or disease. The Penn National policies contained no language requiring the cause of injury to be identifiable before coverage was triggered.

   Therefore, property damage here first became reasonably apparent in April 2004. The significant drop in milk production in April 2004 constituted property damage, as it indicated loss of use of tangible property. The fact that Appellants did not discover the cause of the dairy herd's various maladies until March 2006, had no bearing on determining which policy applied. 

   Considering Appellants' alternative argument that the multiple trigger theory applied to continuous, progressive property damage, thus triggering all of the Penn National policies, the court also disagreed. The policy language demonstrated that, consistent with the first manifestation approach, only the policy in effect when an occurrence first arose was answerable for the ensuing bodily injury or property damage. The Penn National policies provided coverage when an "occurrence" caused either "bodily injury" or "property damage" during the respective policy periods. Pennsylvania had adopted the first manifestation rule, with the lone exception being asbestos bodily injury claims. It was unlikely that the parties would have intended a single occurrence, albeit with property damage continuing past the end of the respective policy period, to trigger coverage under multiple consecutive policies. The better position was to construe the Penn National policies as providing for coverage only under the policy or policies in effect at the time an occurrence first arose. An occurrence first arose when bodily injury or property damage first manifested in a way that became reasonably apparent. 

   Here, the damage sustained to the dairy herd, occasioned by LPH Plumbing's negligent installation of the plumbing system, did not lay dormant for an extended period, as in asbestos cases. Instead, the damage to the dairy herd first manifested in April 2004, less than a year after the dairy herd first began ingesting the contaminated drinking water. Therefore, the court declined to apply the multiple trigger theory to determine coverage under the Penn National policies. Only the policy in effect when damage to the herd first manifested in April 2004 was implicated for the ensuing property damage.

No Coverage For Construction Defect Under Illinois Law

   The court followed precedent in Illinois and upheld the insurer's denial of coverage for construction defects that did not damage other property. Design Concrete Founds., Inc. v. Erie Ins. Prop. & Cas. Co., 2014 Ill. App. Unpub. LEXIS 2684 (Ill Ct. App. Nov. 26, 2014).

   In 2005, the homeowners contracted with the general contractor to build a home. The general contractor hired Design to do the foundation work. Design performed its work in August 2005. After the work was completed, cracks formed in the foundation, allowing water to enter the basement and an inward shifting of the foundation.

   The homeowners sued the general contractor and Design. The complaint alleged that Design failed to build the foundation in a workmanlike manner, resulting in the development of cracks in the foundation. 

   Design had a CGL policy with Erie. When Design tendered the defense of the homeowners' suit, Erie denied coverage because the underlying allegations did not allege an "occurrence" or "property damage" under the policy. Design then filed suit against Erie and Eire moved for summary judgment. The trial court entered summary judgment in favor of Erie.

   The appellate court affirmed. The underlying complaint sought damages to cover the costs to repair and reinforce the foundation. The alleged defects in the concrete foundation were the natural and ordinary consequence of the alleged faulty workmanship. When the work was defective and necessitated repairing that work, there was no "accident" and no "occurrence." 

   Further, there was no property damage. The underlying complaint sought damages for the costs of repair and reinforcement of the foundation which was allegedly caused by Design's faulty construction work. It alleged damage to the foundation itself. It did not allege that defective workmanship resulted in damage to other property. In Illinois, repair and replacement damages were considered economic losses, not property damage.

Appraisers May Determine Causation

   In a case of first impression, the Iowa Court of Appeals held that an appraisal may determine issues of causation. North Glenn Homeowners Association v. State Farm Fire & Cas. Co., 854 N.W. 2d 67 (Iowa Ct. App. 2014).

   On July 15, 2009, North Glenn Homeowners Association submitted a claim to State Farm for hail damage on the roof. The claim was paid. North Glenn did not repair all of the damage, instead deciding to use some of the money to make other repairs to the property.

   A second storm hit the development on March 22, 2011, and a second claim was submitted to State Farm for wind and hail damage. An inspection by State Farm determined the hail damage was from the 2009 storm and was not covered. The wind damage was estimated to be less than the policy deductible.

   North Glenn demanded an appraisal. State Farm agreed to an appraisal of the wind damage, but refused an appraisal of the hail damage. North Glenn sued for a declaratory judgment, seeking a determination of coverage issues and seeking an order for appraisal. North Glenn's motion for appraisal was granted. The trial court found that the appraisal clause required appraisers to examine the loss, which necessitated consideration of any prior loss which occurred or was no longer covered.

   An interlocutory appeal was filed and the court of appeals affirmed. The dispute was over both what caused damage to the roof and whether that damage was covered under the policy or excluded because of North Glenn's prior compensation. A number of states had decided that appraisers have no authority to consider issues of causation. Other states disagreed and held that appraisers, under certain circumstances, may consider causation.

   The court of appeals favored the latter result. As part of the appraisal process, appraisers had to determine what the amount of "loss" was, which often required consideration of causation. Causation was an integral part of the definition of loss, without consideration of which appraisers could not perform their assigned function. During the appraisal process, appraisers had to consider what damage was caused by hail, and what damage was not, or any damage with which they were unconcerned, such as normal wear and tear. Once the appraisal was completed, the matter could be further litigated. Further, the causation determinations by the appraisers were subject to further review by the court. 

  

Less Than Perfectly Drafted Endorsement Bars Flood Coverage

   The court decided that the policy's flood exclusion, despite being poorly located within the policy, barred coverage for loss caused by flood. Great Lakes Int'l Trading Inc. v. Travelers Prop. Cas. Co., 2014 U.S. Dist. LEXIS 165378 (D. Conn. Nov. 26, 2014). 

    Hurricane Sandy caused flood waters from the Hackensack River in New Jersey to inundate a warehouse where the insured had imported food products stored for sale in the United States. High winds also sheared open parts of the warehouse's roof, allowing extensive rainwater to enter the building. 

    The insured had a "Marine Open Cargo Policy" with Travelers. The policy's separate "Warehouse Coverage" endorsement included up to $5 million of coverage for goods at the warehouse. The endorsement provided that "the peril of Flood is excluded" from coverage for the New Jersey warehouse location. 

   Travelers paid the insured nearly $900,000 for damages caused by rainwater entering the warehouse through openings in the roof. But Travelers denied payment for losses of about $650,000 that it believed were caused from the river's flood waters.

   The parties cross-moved for summary judgment.The insured argued that the flood exclusion was not located in the part of the Warehouse Coverage endorsement that listed other exclusions. Instead, the exclusion appeared at the very end of the endorsement without its own paragraph number or sub-heading. The exclusion appeared under a sub-heading for "Earth Movement Sublimit & Deductible," which also referred to sublimits and deductibles for losses stemming from "earth movements" such as earthquakes. Therefore, the insured argued that the flood exclusion applied only when an earthquake or other earth movements induced a flood.

   The court ruled that although the flood exclusion could have more appropriately been set off from other text and located elsewhere in the endorsement, its wording as a flood exclusion was clear. 

   The insured also argued that coverage could exist despite applicability of the flood exclusion under the efficient-proximate-cause or concurrent-causation doctrines. But the exclusion applied to a "flood" without limitation. Floods were not spontaneous and might always be ascribed to underlying causes. It would defeat the purpose of a flood exclusion if a plaintiff was permitted to circumvent it by means of attributing a classic flood to non-excluded sources. Here, there were not two independent causes of the insured's damages at play. The only force that damaged the plaintiff's property was flood.

Hawaii Court of Appeals Remands Bad Faith Claim Against Title Insurer

    The Hawaii Intermediate Court of Appeals (ICA) vacated the trial court's issuance of summary judgment to the title insurer on a bad faith claim and remanded the case. Anastasi v. Fidelity Nat. Title Ins. Co., 2014 Haw. App. LEXIS 585 (Haw. Ct. App. Dec. 30, 2014).

   Fidelity issued a title insurance policy to Anastasi insuring that Alajos Nagy had good title to the property. The policy insured Anastasi against loss in the event a mortgage on the property executed by Nagy was not enforceable. Anastasi had loaned $2.4 million to Nagy and Nagy had executed the mortgage in favor of Anastasi as security for the loan. 

   Nagy's title later came into dispute. Paul Stickney and Gregory Rand claimed to own the property and brought a quiet title action against Nagy and Anastasi (Stickney Lawsuit). Anastasi tendered the claim to Fidelity. Jade Ching, Esq. was retained by Fidelity to defend Anastasi. Fidelity also issued a reservation of rights.

   Summary judgment was eventually granted to the Stickney plaintiffs. After judgment was entered in the Stickney Lawsuit against Anastasi, he filed suit against Fidelity for bad faith. Anastasi claimed that, not long after the Stickney Lawsuit was filed, it became clear that a Warranty Deed purporting to transfer the property to Nagy was forged. Anastasi claimed Fidelity unreasonably delayed in paying him the $2.4 million owed under the title policy. Fidelity paid Anastasi the $2.4 million after he filed suit. Anastasi further claimed that Fidelity improperly controlled Ching's actions in litigating the Stickney Lawsuit.

   On appeal, the ICA initially considered whether the trial court had properly determined ten documents not produced by Fidelity were privileged as attorney-client communications and/or work product. Some of the communications were authored by or received by Elizabeth McGinnity, a Senior Vice-President and Major Claims Counsel for Fidelity. Anastasi argued that McGinnity acted as a claims adjuster, not an attorney, so the attorney-client privileged and work product doctrine did not apply.

   The ICA first determined that the bad faith claim against Fidelity did not nullify the attorney-client privilege. Next, whether McGinnity's communications were privileged depended on whether the communications involved the rendition of professional legal services. McGinnity had dual roles in the case, acting both as claims adjuster and attorney for Fidelity. It appeared to the ICA that some of the documents were not made to facilitate the rendition of legal services. Therefore, the trial court abused its discretion in allowing Fidelity to withhold all of the documents claimed to be privileged because some related to the general handling of Anastasi's insurance claim. The issue was remanded to the circuit court for further proceedings.

   Similarly, it was  not clear that Fidelity had carried its burden of establishing that work-product doctrine applied to preclude discovery of all of the documents withheld by Fidelity. This issue was also remanded to the trial court for further proceedings.

   Turning to the summary judgment determination that Fidelity had not acted in bad faith, Fidelity was aware of evidence showing that the Warranty Deed purporting to transfer the property to Nagy had been forged. Anastasi argued that Fidelity nonetheless chose to continue litigating in the face of an apparent forgery. The ICA agreed that, for summary judgment purposes, it was not clear that Fidelity had acted reasonably in continuing to litigate the Stickney Lawsuit. The legal and coverage consequences of a finding of fraud by the Stickney plaintiffs was unclear. Therefore, the ICA could not say as a matter of law that where Fidelity apparently believed there was a forgery of the Warranty Deed, its actions thereafter were reasonable and that summary judgment was appropriate.  Further, there was at least a genuine issue of material fact on whether Fidelity's actions were motivated more by a desire to obtain recoupment in the Stickney Lawsuit of funds it might have to pay to Anastasi, rather than a concern for providing the protection owed to the insured under the policy. Therefore, summary judgment was not appropriate.

   Finally, the ICA determined there was no evidence that Ching had breached her duties owed to Anastasi and devoted her loyalties to Fidelity. Ching testified at her deposition that Fidelity did not direct her in how to defend Anastasi and that she determined the legal strategy used to defend Anastasi. There was correspondence between Ching and McGinnity as to whether to file an appeal from the summary judgment issued in the Stickney Lawsuit. The documents did not show that Ching was precluded from exercising her professional judgment, but that she wanted to preserve her client's appeal rights and that Fidelity agreed with her position. Accordingly, Anastasi failed to show any genuine issue of material fact that Ching breached her ethical duties to him or that Fidelity induces any such breach. 

Hawaii Federal Court Grants Insured's Motion for Remand

   The federal district court, district of Hawaii, recently granted the insured's motion for remand. Catholic Foreign Mission Society of Am., Inc. v. Arrowood Indem. Co., Civ. No. 14-00420, Order Granting Plaintiff's Motion for Remand and Denying Defendants' Motion to Dismiss or Transfer (D. Haw. Dec. 30, 2014) [Order here]. [Full disclosure - our office represents the insured, Maryknoll].

   Maryknoll was sued in several lawsuits filed in Hawaii state court by victims of alleged sexual abuse occurring as far back as the 1950s by members of the clergy. Maryknoll was insured during these periods under liability policies issued by various carriers. The successor of Royal Globe Insurance Company, Arrowood Indemnity Company, agreed to defend some of the underlying lawsuits, but declined to defend others. The Travelers Companies, Inc. refused to defend.

   Arrowood filed a complaint  in the Southern District of New York for a declaratory judgment on its coverage obligations to Maryknoll. Thereafter, Maryknoll sued Arrowood and Travelers in Hawaii state court. (Travelers contends it is improperly named as a defendant, and the proper defendant is St. Paul Fire and Marine Insurance Company). Arrowood and Travelers/St. Paul removed to the federal district court in Hawaii. Maryknoll subsequently filed for leave to amend by filing a second amended complaint. The proposed second amended complaint would add additional insurers and seek coverage for additional underlying lawsuits filed against Maryknoll. Further, Maryknoll moved to remand the case back to state court, while Arrowood moved to dismiss the Hawaii coverage action or transfer the case to the Southern District of New York. 

   The Hawaii federal district court granted Maryknoll's motion for remand and denied Arrowood's motion to dismiss or transfer. The court relied on factors set forth in Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491 (1942) and Gov't Employees Ins. Co. v. Dizol, 133 F.ed 1220 (9th Cir. 1998). 

   The court's order first addressed a dispute among the parties as to whether the underlying state court actions were "parallel" state court proceedings that would weigh in favor of remand. The court agreed with Maryknoll that the underlying cases were sufficiently parallel state court proceedings. If the allegations raised in the underlying proceedings raised any possibility of coverage, the insurers would have a duty to defend. The duty to indemnify also rested on factual determinations made in the underlying state cases.

   The court next found that the Brillhart factors favored remand. The coverage action presented no federal question nor was any federal interest at issue. The cases was governed by state law. Remand would avoid needless determination of state insurance law issues.

   Hawaii also had a stronger interest in seeing its insurance laws applied than New York had in seeing New York law applied. All of the underlying lawsuits were filed in Hawaii. The fact witnesses in the underlying lawsuits were located in Hawaii. Hawaii was the state which the parties understood to be the principal location of the insured risk during the years of the policies.

   The court also agreed that ordering remand would discourage forum shopping. Before Arrowood filed its suit in New York, the parties were discussing coverage issues. When Arrowood refused to defend some of the underlying cases, Maryknoll warned that it would have no alternative but to seek declaratory relief against Arrowood. Shortly thereafter, Arrowood filed its suit in the Southern District of New York.

   The court further determined that remand would avoid duplicative litigation. The coverage action raised many of the same issues before the state courts in the underlying actions.

   The Dizol factors also favored remand. The underlying lawsuits were still being litigated in state court and the resolution of issues in these underlying cases would have an impact on the coverage issues. The state court was in a better position to resolve the issues raised in the declaratory judgment action. Maintaining the declaratory action in the federal district court would therefore result in entanglement between the federal and state court systems. 

   Finally, the convenience of the parties and the availability and relative convenience for witnesses weighed in favor of remand. The circumstances giving rise to the underlying state cases occurred in Hawaii. A remedy for the federal court's decision to decline to exercise jurisdiction was readily available in the form of remand to the Hawaii state court. 

Additional Insurance Coverage Determined for General Contractor

   A series of communications requiring the subcontractor to provide additional insured  coverage for the contractor were sufficient to fit within the policy's provision identifying additional insureds. KB Home Tucson, Inc. v. The Charter Oak Fire Ins. Co., 2014 Ariz. App. LEXIS 228 (Ariz. Ct. App. Nov. 25, 2014).

    KB, the general contractor, hired CRG Construction Co., Inc. in 1999 to perform work at a residential subdivision in Tucson. Charter Oak provided liability coverage for CRG, including additional insured coverage for any person or entity that CRG was obligated to cover under written contract or agreement. 

   CRG's written contract with KB provided that CRG would purchase and pay for public liability insurance. After the contract was signed, KB sent annual letters to CRG describing its insurance requirements. The letters detailed the minimum coverage mandated by KB and stated that KB must be named as an additional insured on CRG's general liability policy. 

    In May 2001, the City of Tucson asserted a claim against KB alleging deficiencies in streets and sidewalks within KB's residential subdivision project. KB sued CRG and other subcontractors for reimbursement for repair costs and attorney's fees incurred in defending against the City's claims. In February 2005, several homeowners in the project sued KB for damage to their homes allegedly resulting from construction defects. KB tendered its defense on both the City's and homewoners' claims to Charter Oak. Coverage was denied because KB was not an additional insured. There was no written contract or agreement requiring that CRG add KB as an additional insured.

   KB sued Charter Oak. Charter Oak moved for summary judgment, which was granted by the trial court.

   On appeal, the court concluded that a reasonable fact-finder could find that KB had an "executed" written agreement with CRG requiring it to provide additional insured coverage. Although there was no specific document signed by both parties, written documents prepared by or at the direction of KB and CRG established such an agreement. KB's correspondence made clear the requirement that CRG add KB as an additional insured on its general liability policies and CRG carried out and completed the agreement by directing its agents to provide certificates of insurance listing KB as an additional insured.

   Accordingly, the summary judgment granted in favor of Charter Oak was reversed.

   

Conditional Judgment On Replacement Costs Awarded

   The appellate court determined that a conditional judgment on replacement costs was appropriate after the insurer denied coverage. Stephens & Stephens XII, LLC v. Fireman's Fund Ins. Co., 2014 Cal. App. LEXIS 1073 (Cal. Ct. App. Nov. 24, 2014).

   Stephens operated a large industrial warehouse. It initially purchased a commercial liability policy from Fireman's Fund when an tenant occupied the building. After the tenant left, Stephens purchased from Fireman's Fund property coverage  on June 28, 2007. On July 1, Stephens discovered that burglars had caused more than $2 million in damage to the property. All conductive material was stripped from the building and taken away. There was water damage throughout the building. The estimated cost of repair exceeded $1 million. 

   Stephens notified Fireman's Fund. The insurer paid emergency repairs, but it neither accepted nor denied coverage for the loss. Finally, five years after the incident and on the eve of trial, Fireman's Fund denied coverage.

   At trial, the jury found for Stephens on its claims for breach of contract and breach of the covenant of good faith and fair dealing. The jury awarded $2,100,293 for the replacement cost of the damage to the property and $2,135,936 in lost business income. Under the claim for breach of the covenant of good faith and fair dealing, the jury awarded $436,896 for "lost rents." 

   Fireman's Fund moved for a Judgment Notwithstanding Verdict (JNOV), contending Stephens was not entitled to replacement cost as a matter of law because it had not satisfied the precondition of the repair requirement under the policy. The trial court granted the motion, finding that Stephens was required to complete the repairs before it was entitled to receive replacement costs.The court also found that Stephens could not have suffered lost business income because it did not conduct any business at the property, as required by the policy. In addition, the court overturned the jury's award of bad faith damages because no compensatory damages had been properly awarded. 

   On appeal, the court noted that most replacement cost policies required actual repair or replacement of the damaged property as a condition precedent to recovery under the policy. Here, the court agreed Stephens was prevented from repairing the damage by Firemen's Fund's failure to accept coverage. When an insurer's decision to decline coverage hindered an insured from repairing damaged property, procedural obstacles to obtaining the replacement-cost value were excused. If coverage was resolved in favor of the insured, the insured should remain eligible to receive replacement costs, so long as the insured complied with other applicable policy terms, such as a repair requirement. Therefore, Stephens was entitled to a judgment declaring its right to receive reimbursement for repair costs, if and when the repairs were actually performed in a timely manner.

   The appellate court also upheld the jury's award for lost business income because it was properly construed as an award for compensable lost rent.