Insurance Law Hawaii

Duty to Defend Allegations of Sexual Assault

   The court determined that there was a duty to defend allegations that included sexual assault. Med. Malpractice Joint Underwriting Ass'n of R.I. v. Charlesgate Nursing Ctr., 2015 R.I. LEXIS 76 (R.I. June 5, 2015).

    A resident of Charlesgate alleged that one of the employees, a certified nursing assistant, sexually assaulted her. She further alleged that the incident was not timely reported to management at Charlesgate and that the employee was allowed to continue working.

   The resident sued Charlesgate, two of its general partners, and two employees, alleging negligence against Charlesgate and assault and battery against the certified nursing assistant. The negligence allegations included failure to: properly supervise, train or screen employees; provide proper security measures; report that a resident had been abused or mistreated in a timely manner; and discipline its employees following the alleged sexual assault. 

   Charlesgate had coverage for hospital professional liability (HPL) and commercial general liability (CGL). Coverage was denied because (1) the alleged sexual assault did not constitute a "medical incident" and (2) the alleged sexual assault was not an accident, meaning there was not an "occurrence."

   The insurer filed for a declaratory judgment on its coverage obligation. Both parties moved for summary judgment. Charlesgate's motion was granted, finding the insurer had a duty to defend.

   On appeal, the Supreme Court noted that the insurer wanted the Court to treat all facts alleged in the complaint as averring only a violent, intentional sexual assault. But the complaint also included independent factual allegations offered in support of the claims of negligence on the part of Charlesgate. The Charlesgate defendants were the insureds seeking coverage, not the employee who allegedly committed the sexual assault. There were no allegations of intentional or sexual activity by the Charlesgate defendants in the complaint.

   The court did not consider the subjective intent of the parties, but instead the intent expressed by the policy. The insurer argued that because of the intentional nature of the alleged sexual assault by a Charlesgate employee, there was no "occurrence."

    This argument ignored the sexual act and intended-injury exclusions. If the insurer's narrow reading of "accident" and "occurrence" was adopted, then the intended-injury and sexual act exclusions would serve no purpose if all intended injuries and injuries arising out of sexual acts were excluded in the first instance by the terms of the policy itself. 

   Therefore, the court affirmed the granting of summary judgment to Charlesgate.

   The Rhode Island court's systematic analysis was refreshing. It initially construed the insuring agreement and whether there was an occurrence. Only then did it turn to the exclusions to determine whether coverage was negated. 

Ensuing Loss Does Not Salvage Coverage For Defective Design

   A Builders Risk policy's ensuing loss exception to the exclusion for defective design was held inapplicable. Performing Arts Cmty. Improvement Dist. v. Ace Am. Ins. Co., 2015 U. S. Dist. LEXIS 71592 (W. D. Mo. June 3, 2015).

   Plaintiff oversaw the design and construction of a parking garage. The project included installation of a fifty foot retaining wall between the garage and limestone rock face. The design called for concrete fill in the area between the retaining wall and the limestone embankment. The architect and structural engineer provided the design for the retaining wall and the specifications for 18 inches of back-fill between the wall and the embankment. The general contractor requested approval for an increase in the amount of fill, up to 36 inches, which the structural engineer approved. 

   Construction commenced. During installation of the fill, the wall cracked, requiring an investigation, repair and replacement. Plaintiff's expert determined the design permitted too much fill between the wall and the embankment. 

   The Builder's Risk policy included exclusions, as follows:

This policy does not insure loss or damage caused by any of the following unless direct physical loss or damage by an insured cause of loss ensues and then this policy insures only such ensuing direct physical loss or damage.

.  .  .  

Error, omission or deficiency in design, plans, specifications, engineering or surveying. 

   The plaintiff requested coverage, but Ace denied coverage because the wall's failure was caused by the defective design, and no insurable cause occurred thereafter. 

   Plaintiff filed suit, contending the exclusion did not apply because the wall's failure was "direct physical loss or damage by an insured cause of loss" that "ensued" after the deficient plans.

   The exception to the exclusion invoked by plaintiff only came into play if "loss or damage by an insured cause of loss ensued." Plaintiff argued the ensuing cause of loss was the excessive pressure caused by the fill. The court characterized this argument as an attempt to divorce the defective design from the losses it caused.

    This argument was not legally viable. An ensuing loss was one that occurred subsequent to the excluded loss. This case presented no subsequent event. A defective wall was created (in accordance with the defective plans), and the defective wall failed. There was no ensuing event that caused the wall to fail. If a defectively designed retaining wall failed to retain the pressure it was intended to retain, one did not characterize the pressure as a distinct and separate event, and the resulting need to replace the defectively designed wall was not an ensuing loss.

  This short opinion provides a helpful, conceptual analysis of how the ensuing loss provision is applied. 

    

Claim Based on Lost Policy Survives Motion to Dismiss

   The First Circuit reversed the district court's denial of the insureds' claim for coverage despite not being able to locate the actual policy. Cardigan Mt. School v. N.H. Ins. Co., 2015 U.S. App. LEXIS 8725 (1st Cir. May 27, 2015). 

   In 2013, the school received a demand letter asserting a claim based upon events that allegedly occurred during the 1967-1968 school year. The record before the First Circuit did not include the details of what occurred. The school sought a defense from New Hampshire Insurance Company under a policy the school argued had been issued during the relevant time period. 

   New Hampshire rejected the request. It was unable to locate any policy covering the school during the relevant time period. New Hampshire argued it was not the school's carrier at the time of the alleged incidents. 

   The school filed suit, seeking a judgment adjudicating and declaring the existence of, and the school's rights under, a policy issued by New Hampshire. The district court granted New Hampshire's motion to dismiss, concluding that the school's complaint did not plausibly show the existence of the policy.

   On appeal, the First Circuit noted that the complaint did not include a direct allegation that the insurance policy existed. Instead, it alleged that an accounting firm prepared an audit report for the school dated September 1971. The report stated that from September 1970 to September 1971, the school had a "Special Multi-Peril" policy from New Hampshire, which included $1,000,000 in "General Liability" Coverage. 

   The school's complaint alleged that "Cornelius Bakker, the school's business manager between 1967 and 1970, is certain the school had insurance during his tenure." The complaint further alleged that Bakker worked with a local insurance broker to secure coverage for the school. And the complaint alleged that Bakker did not believe that the school changed carriers while he was the business manager between 1967 and 1970. 

   The First Circuit found these allegations to be specific and factual enough to survive a motion to dismiss. The school alleged specific facts concerning an audit report that tended to show that it had a policy from New Hampshire as of 1971. The school then linked that allegation to the recollections of specific individuals who were involved in the relevant events and believed both that the school had a general liability policy in the preceding years, including the crucial 1967-1968 school year, and that there had been no change in carrier during that period of time. 

   There is no Hawaii case law regarding burdens of proof and the necessary showing to demonstrate coverage for years in which a policy cannot be located. This case should be of interest to Hawaii practitioners faced with disputed issues of coverage where there is evidence of a policy but no actual policy. 

   

Fire Causing Mudslide That Destroys Home Presents Triable Issue on Causation

   The Ninth Circuit determined that a mudslide destroying the insureds' home may be covered as a direct loss due to fire that preceded the mudslide. Stankova v. Metro. Prop. & Cas. Ins. Co., 2015 U.S. App. LEXIS 8935 (9th Cir. May 29, 2015).

   The insureds' garage was destroyed by a massive fire in Arizona in 2011. The fire did not reach the house. A month after the wildfire was contained, a mudslide and runoff water from the hillside destroyed the insureds' house. 

   The insureds' policy provided coverage for "sudden and accidental direct physical loss or damage" if the loss was caused by one of several named perils. "Fire or Lighting" was a covered peril, but water damage and earth movement, including mudslides, were not covered. The loss of the garage was covered, but coverage for the home was denied due to flood water and earth movement exclusions. The insured contested this determination, arguing the fire was the actual and proximate cause of the loss.

   The insureds sued and both parties moved for summary judgment. The district court found in favor of the insurer.

   On appeal, the Ninth Circuit noted that Arizona had not adopted the doctrine of "efficient proximate cause." The key question, therefore, was whether the mudslide that damaged the home was "directly" caused by fire. Under the definition of direct and proximate cause as adopted by Arizona, it was possible that the fire directly caused the insureds' loss in an unbroken sequence between the wildfire and the destruction of the home. A reasonable fact finder could conclude that the destruction of the house was caused by the fire, which likely caused the mudslide. 

   It was not necessary to apply the efficient proximate cause doctrine to find that the damage here could have been directly and proximately caused by the wildfire. The evidence in the record was limited, but the district court erred in concluding that, under Arizona law, the insurer was entitled to summary judgment. There was a triable issue as to whether the fire directly caused the destruction of the home.

"Collapse" Found to be "Substantial Impairment of Structural Integrity"

   In response to a certified question from the Ninth Circuit, the Washington Supreme Court recently found that collapse in a property policy means "substantial impairment of structural integrity." Queen Anne Park Homeowners Ass'n v. State Farm Fire & Cas. Co., 2015 Wash. LEXIS 695 (Wash. June 18, 2015).

    Queen Anne Park was a two-building condominium in Seattle that was insured by State Farm. The policy covered "any accidental direct physical loss to covered property involving collapse of a building or any part of a building caused only by one or more of the following . . . (2) hidden decay." The policy further stated that "collapse does not include settling, cracking, shrinking, bulging or expansion." The policy did not define the term "collapse."

   The Queen Anne Park Homeowners Association (HOA) filed a claim with State Farm claiming the building had collapsed. An HOA engineer found hidden decay in some shear walls, which he opined had substantially impaired the walls' ability to resist lateral loads. State Farm conducted its own inspection, and concluded there was no loss due to collapse during the policy term. 

   The HOA filed suit. The district court granted summary judgment to State Farm. The HOA appealed to the Ninth Circuit, which certified a question of state law to the Washington Supreme Court:

What does "collapse" mean under Washington law in an insurance policy that insures "accidental direct physical loss involving collapse,"  . . . but does not define "collapse," except to state that "collapse does not include settling, cracking, shrinking, bulging or expansion"?

    The Washington Supreme Court noted that courts across the country had adopted different but reasonable definitions of "collapse" in policies. The range of reasonable definitions of "collapse" adopted by various courts demonstrated that the term was ambiguous. 

   Here, the insured requested that "collapse" be interpreted to mean "substantial impairment of structural integrity." The court largely agreed. This was a reasonable definition, most favorable to the insured. Based on the language of the policy, however, "collapse" had to mean something more than mere "settling, cracking, shrinking, bulging or expansion." Taken together, "substantial impairment" of "structural integrity" meant an impairment so severe as to materially impair a building's ability to remain upright. Therefore, "substantial impairment of structural integrity" meant the substantial impairment of the structural integrity of all or part of a building that renders all or part of the building unfit for its function or unsafe and, in this case, means more than shrinkage, bulging, or expansion. 

Request for Independent Counsel Deemed Premature

   The California Court of Appeal affirmed the trial court's denial of the insured's request for independent counsel. Centex Homes v. St. Paul Fire and Marine Ins. Co., 237 Cal. App. 4th 23 (Cal. Ct. App. 2015).

   Centex, a developer of single family residences, was sued by homeowners for alleged construction defects. Centex tendered the defense to Travelers, which accept the defense subject to a reservation of rights, including the right to choose defense counsel.

     Meanwhile, Centex sued its 57 subcontractors, alleging six causes of action for breach of contract to indemnify, defend, and obtain insurance, for equitable indemnity and for contribution and repayment. The complaint also sought declaratory relief from Travelers. The seventh cause of action alleged that the homeowners were suing for construction defects caused by subcontractors who were insured by Travelers and that Centex was a named additional insured. Centex alleged that Travelers reserved the right to reimbursement, requiring the allocation of Centex's defense fees and and costs in the underlying action to be determined.

   The eighth cause of action alleged that Travelers breached its duty to provide Centex with independent counsel because Travelers had a conflict of interest. Centex alleged that Travelers wanted to limit the scope of its coverage to the work of its named insured, Oak Leaf. Further, Travelers was competing with Centex by seeking recovery from other subcontractors and forcing Centex to share counsel with the subcontractors, while controlling and manipulating Centex's defense, particularly through the use of experts.

   The trial court granted Travelers' demurrer, finding that the seventh cause of action was not ripe and there was no actual present conflict requiring independent counsel requested in the eighth cause of action. 

   On appeal, Centex identified the following as disputed areas with Travelers: (1) whether Travelers had the right to be reimbursed by Centex for all defense fees that related to the work of subcontractors it did not insure; (2) whether Travelers had the right to be reimbursed for defense fees in proportion to the ultimate amount it paid for indemnity for the subcontractors it insured; and (3) whether Travelers had the right to reimbursement for all defense fees not related to property damage arising from the work of its named insured subcontractor, Oak Leaf. 

    The court found all these claims were anticipatory and not ripe. It was still unknown whether Oak Leaf's work caused the property damage claimed by the homeowners.The proportionate liability of all the subcontractors had also not been adjudicated. Nor had the amount of defense fees been established in the ongoing underlying litigation. Therefore, the trial court correctly determined that the seventh cause of action was not ripe. 

   Regarding the eighth cause of action, Centex argued that Travelers' appointed counsel could challenge the liability of Oak Leaf, creating a direct conflict of interest by enhancing Travelers' reimbursement claims against Centex. Again, however, these anticipated circumstances had not yet occurred in the underlying litigation. Further, Travelers had the same interest in defending the underlying claim as Centex. Therefore, the trial court properly sustained the demurrer to the eighth cause of action. 

    Thanks to my Damon Key blogging colleague, Robert Thomas (www.inversecondemnation.com), for flagging this case.

Adjuster's Report No Substitute for Proof of Loss Under Flood Policy

   The insured's claim for flood coverage was denied when the insurer refused to accept an adjuster's report submitted without a proof of loss. Jackson v. Fid. Nat'l Ins. Co., 2015 U.S. Dist. LEXIS 66589 (E.D. La. May 21, 2015).

   Plaintiff's property was damaged by Hurricane Isaac. Defendant Fidelity provided flood coverage for the property through the National Flood Insurance Program (NFIP). After plaintiff submitted a flood claim, she executed a proof of loss for $53,803.02. A second proof of loss for contents was submitted in the amount of $26,556.13. Fidelity paid both these claims.

   Thereafter, an adjuster's estimate of plaintiff's damages, totaling $284,332.91, was submitted to Fidelity. Plaintiff did not submit a supplemental proof of loss for this claim. Fidelity refused to pay the claim and plaintiff filed suit. 

   Fidelity's motion for summary judgment was granted because plaintiff never submitted a proof of loss for any amount beyond what she was paid. A regulation governing the NFIP stated that the insurer "may accept the adjuster's report of loss instead of your proof of loss." Fidelity could have waived the proof of loss requirement, but plaintiff offered no evidence that Fidelity exercised its discretion and waived the requirement. Further, the adjuster's estimate sent to Fidelity did not bear plaintiff's signature.

   Plaintiff next contended that the adjuster's report coupled with the initial verified proof of loss satisfied the proof of loss requirement. Again, the court disagreed. There was no genuine issue of material fact that plaintiff did not satisfy the proof of loss requirement when she submitted an adjuster's report for additional damages without an accompanying signed and sworn proof of loss. 

   This is yet another case enforcing that requirements for coverage under the NFIP are strictly construed. 

Pay Loss Provision Does Not Preclude Assignment of Post-Loss Claim

   The court determined that a policy's loss payment provision did not bar a post-loss assignment. One Call Prop. Servs. v. Sec. First Ins. Co., 2015 Fl. App. LEXIS 7643 (Fla. Ct. App. May 20, 2015). 

   After One Cell performed emergency water removal for the insured, the insured assigned his rights to policy proceeds as payment. One Cell alleged that Security First refused to reimburse the insured adequately for the services provided. One Cell filed suit, and Security First moved to dismiss. The trial court granted the motion based upon the policy's non-assignment provision.

   One Cell appealed. One Cell argued post-loss assignments were valid under Florida law even when the policy contained an anti-assignment provision, and the right to payment accrued on the date of the loss. 

   Relying on the loss payment provision, Security First argued that when the assignment was executed, the insured had nothing to assign because benefits were not yet due to the insured under the policy. The loss payment provision provided, in part, that the loss would be paid within a specific number of days after a written proof of loss was submitted.

   The court found that the loss payment provision did not create a contractual bar to the assignment, even though payment was not yet due. The loss payment clause merely addressed the timing of the payment. An assignable right to benefits accrued on the date of the loss, even though payment was not yet due under the loss payment clause. Dismissal of the complaint was reversed and the case was remanded for further proceedings. 

   In Del Monte Fresh Produce (Hawaii), Inc. v. Fireman's Fudn Ins. Co., 117 Haw. 357, 183 P.3d 734 (2007), the Hawaii Supreme Court upheld the anti-assignment provisions in various policies issued to the insured because none of the insureds consented to the assignment.