Insurance Law Hawaii

Insurer Must Defend Despite Endorsement Limiting Coverage for Additional Insured

       The appellate court reversed, in part, determining that the insurer had a duty to defend. Cumberland Farms, Inc. v. Tower Group, Inc., 2026 N. Y. App. Div. LEXIS 2039 ( Supr. Ct. N. Y. App. Div. March 23, 2016).

     In 2008, the underlying plaintiff was injured when he tripped and fell on a sidewalk in front of a gas station operated by Noori Auto & Fuel, Inc. Noori was a franchisee and lesser with Cumberland Farms, Inc. Noori was insured by Mountain Valley Indemnity Company. Cumberland was an additional insured under the policy.

    The underlying plaintiff sued Mountain Valley and its affiliate, Tower Group, Inc. Mountain Valley and Tower Group moved for summary judgment, seeking a ruling that they were not obligated to defend. Cumberland cross appealed. The lower court denied both motions.

    On appeal, the insurers contended that although Cumberland was an additional insured under the policy, an endorsement stated that Cumberland was an additional insured "only with respect to its liability as a grantor of a franchise to the named insured." Because the underlying complaint did not specifically allege that Cumberland was liable as a franchiser, Cumberland was not an additional insured. Cumberland also argued that Tower Group was not obligated to defend because it did not issue the policy to Noori.

    The underlying complaint alleged that Cumberland was negligent in its ownership, operation, control, and maintenance of the gas station. But in support of their motion, the insurers submitted evidence that Cumberland leased the gas station to Noori as a franchisee. Since Cumberland's liability, if any, could hinge on the scope of its obligations under the franchisor/franchisee agreement, the allegations of the complaint suggested a reasonable possibility of coverage for Cumberland in the underlying action.

   The lower court also erred in not granting the insurers' motion to the extent it sought a ruling that Tower Group was not obligated to defend or indemnify Cumberland in the underlying action.

No Entitlement to Reimbursement of Pre-Tender Fees

   The Federal District Court for the District of Hawaii determined that the insured was not entitled to pre-tender defense fees. The Hanover Ins. Co. v. Anova Food, LLC, 2016 U.S. Dist. LEXIS 38947 (D. Haw. March 24, 2016).

   Anova sold and marketed fish. It was insured under policies issued by Hanover that covered claims of "personal and advertising injury."  

   A patent infringement and false advertising case was filed against Anova in the District Court for the District of Hawaii.The underlying complaint alleged Anova falsely, misleadingly, and deceptively advertised, promoted, and sold fish. The allegations covered a period of time between 1999 and 2012, a portion of which time Anova was covered by the Hanover policies. 

   On October 12, 2012, nine months after the underlying lawsuit was filed, Anova requested that Hanover provide a defense. Hanover agreed to defend on December 4, 2012, but subject to a reservation of rights. Shortly thereafter, Anova retained the Zobrist law firm, a mainland firm, to represent it in the underlying case. Hanover sent a supplementary reservation of rights letter, again agreeing to defend, but appointing Gary Grimmer as defense counsel. The letter stated that Hanover had no obligation to pay for or reimburse any fees and costs incurred by Anova prior to the date of Anova's tender. 

   The underlying case settled. Hanover eventually paid $284,624 in attorneys fees to the Zobrist law firm. Anova contended that the Zobrist law firm was owed significantly more attorneys' fees. Subsequently, Hanover transferred Anova's defense to attorneys, Wesley H.H. Ching and Leighton K. Chong. Hanover advised Anova that it would no longer pay for fees generated by the Zobrist law firm.

   Hanover filed suit for a declaratory judgment. Anova moved for partial summary judgment. Anova first contended that pre-tender fees were owed for the period of time before it requested a defense from Hanover. Second, Anova sought post-tender fees incurred after informing Hanover of their need to provide a defense on October 12, 2012.

   The court first determined that Florida law applied to the interpretation of the policies. Florida was the state with the most significant interest in having its laws applied.

   Next, the court found that Hanover had a duty to defend. The policies provided coverage for false advertising. The underlying complaint alleged that Anova had engaged in false advertising and unfair competition. Therefore, Anova's motion for partial summary judgment on Hanover's duty to defend was granted. 

   Turning to pre-tender fees, the court found that Hanover's December 12, 2012 reservation of rights letter did not constitute a breach of contract. Hanover agreed to provide a defense and appointed Mr. Grimmer, who Anova agreed would serve as defense counsel. Accordingly, pre-tender fees were not recoverable. Anova was not entitled to fees it incurred before it requested a defense on October 12, 2012. 

   Regarding post-tender fees, Hanover did not pay all of the post-tender fees to the Zobrist law firm. There were disputed questions of material fact concerning the post-tender fees that Anova incurred from the Zobrist law firm that prevented summary judgment. In the December 10, 2013 letter, Hanover stated that Anova would be responsible to pay for any attorneys fees for the Zobrist law firm if it chose to retain the firm. Hanover contended it did not agree to hire the Zobrist law firm, despite the contradictory evidence that it paid for a portion of the Zobrist law firm's attorneys fees. There were no facts to indicate for which period of time the attorneys' fees were paid to the Zobrist firm by Hanover. The record did not include what agreement was reached concerning the billing for the Zobrist law firm. These unresolved facts precluded the court from determining if Anova was entitled to additional attorneys' fees for the Zobrist law firm. 

Depreciating Labor Costs May be Factor in Actual Cash Value

   The Minnesota Supreme Court considered a certified question from the the U.S. District Court regarding consideration of depreciating labor costs in determining the actual cash value of a loss. Wilcox v. State Farm Fire & Cas. Co., 2016 Min. LEXIS 50 (Minn. Feb. 10, 2016).

   The insureds' home was damaged by hail. State Farm provided a written estimate that calculated the actual cash value of the loss. To estimate the actual cash value of the damaged property, State Farm first calculated the replacement costs of individual items, such as roof flashing, siding, fascia, gutters, and window screens. Next, State Farm subtracted the pre-loss depreciation of some, but not all, individual items. For example, State Farm depreciated the cost of removing and replacing certain materials, such as siding. State Farm did not depreciate the cost of the new siding separately from the cost of the labor required to install the new siding on the home. Instead, State Farm calculated the removal and replacement of the siding as a single cost, then depreciated the removal-and-replacement cost as a whole. The cost of labor to repair or replace the damaged property was referred to by the court as "embedded labor costs."

   Suit was filed, alleging that State Farm's practice of depreciating embedded labor costs breached the duty to indemnify the insured for the actual cash value of the damaged property. The policy provided that State Farm would pay "only the actual cash value at the time of the loss of the damaged party of the property" until the property was repaired or replaced. Then State Farm would pay the full repair or replacement costs. "Actual Cash Value" was not defined by the policy, nor were the methods described for calculating actual cash value.

   State Farm moved to dismiss the complaint. The magistrate judge concluded that labor depreciation was not permitted when the policy did not define "actual cash value" and recommended that the district court deny State Farm's motion to dismiss. The district court certified the question regarding depreciation of embedded labor costs to the Minnesota Supreme Court.

   Minnesota adopts the broad evidence rule in calculating the actual cash value of a loss. The breadth of discretion provided to the trier of fact under the broad evidence rule was the best method to assure complete indemnity to the insured. The rule provided a flexible approach that considered several relevant facts such as the original cost of the property, the market value of the property at the time of loss, the cost of reconstruction, the cost of removing debris, the amount of salvage, and the potential remaining uses of the property. The jury could also consider opinions on value given by expert witnesses. 

   The broad evidence rule did not dictate whether labor was depreciable or not depreciable. Rather, embedded-labor-cost depreciation was one factor that the trier of fact could consider amoung other factors to determine the actual cash value of the damaged property. 

   Therefore, the court answered the certified question as follows:

    When a homeowner's policy does not define the term "actual cash value" or otherwise state whether embedded labor costs are depreciable for the purpose of calculating actual cash value, the trier of fact may consider embedded-labor-cost depreciation when such evidence logically tends to establish the actual cash value of a covered loss. Embedded-labor-cost depreciation, however, is only one of many factors to be considered by the trier of fact; and its relevance depends on the facts and circumstances of the particular case.

Ninth Circuit Holds Efficient Proximate Cause Doctrine Applies Beyond All-Risk Policies

   The Ninth Circuit held that the efficient proximate cause doctrine is not limited to all-risk policies. Olin Corp. v. Continental Cas. Co., 2016 U.S. App. LEXIS 4905 (9th Cir. March 17, 2016). 

   Olin operated a plant that produced industrial chemicals. Continental issued a policy covering the plant's boilers and machinery. In late 2008, the machinery was damaged. Continental denied coverage for damage to Olin's diaphragm cells, which were tanks containing metal cathodes covered by asbestos diaphragms. Continental argued that the damage to the cells was not covered because it was not caused by an "accident." The jury returned a verdict in favor of Olin. 

   Continental appealed. It first argued that the district court erred in applying the efficient proximate cause doctrine. Under the doctrine, the peril that set in motion the chain of events leading to the loss or the "predominating cause" was deemed the efficient proximate cause or legal cause of the loss. The Ninth Circuit disagreed that the doctrine only applied to all-risk policies.

   Next, Continental argued that because its policy covered only "direct damage" to covered property caused by a covered cause of loss, the policy language precluded the use of the efficient proximate cause doctrine. Under the policy language, coverage existed only when a covered peril was the last link in the causal chain that terminated in the damage, and not when a covered peril only sets in motion the chain of events leading to the loss. No cases were cited by Continental to support its argument, however. The court found that the use of "direct damage" in the policy was consistent with the efficient proximate cause doctrine.

   Continental next contended that the district court erred in determining that the word "corrosion" in the policy was ambiguous as applied to the facts of this case. The issue was whether the term "corrosion" included the penetration of magnetite dendrites into asbestos diaphragms that were baked onto metal cathodes inside the cells. The Ninth Circuit determined that the district court correctly determined that whether this process was "corrosion" was ambiguous. The policy did not define "corrosion." Moreover, the asbestos diaphragms did not themselves corrode. Instead, the metal cathodes corroded, and byproducts of this corrosion penetrated the diaphragms, causing them damage. Because the word "corrosion" as applied to this case led to multiple reasonable interpretations, the district court correctly determined that the term was ambiguous.

   The district court's judgment was affirmed.

Homeowner's Mold Claim Denied Due to Spoilation

   The trial court's issuance of summary judgment to the insurer for mold and water damage was upheld on appeal. Schwartz v. Encompass Indem. Co., 2016 Mich. App. LEXIS 551 (Mich. Ct. App. March 15, 2016).

    The contractor was demolishing a portion of the insured's home when he discovered water damage and what appeared to be mold. The contractor believed this damage was due to improper roof installation and leaks around the windows. Further demolition was done to water-damaged portions of the home. 

   The insured filed a claim with Encompass for mold and "over-demolition." When Encompass's adjuster inspected the home, none of the alleged mold-affected material was present because it had been removed from the site by the contractor. The claims were denied.

   The insured filed suit and Encompass moved for summary judgment. The trial court found that both the claim for mold and over-demolition were covered losses. However, the insured could not recover on the mold because of spoilation of evidence, and was precluded from recovery on the demolition claim due to the exclusion for faulty workmanship.

   The appellate court agreed. The insured sought to recover costs associated with the contractor's extensive demolition. The demolition was done either due to the contractor's error or his faulty workmanship, or due to the contractor's addressing faulty workmanship of the persons responsible for the roof and window installation. The contractor was the insured's agent. The insured presented evidence that the contractor acted in error, but even if the contractor's work was faulty, it was excluded under the homeowner's policy. 

   The insured also argued that the trial court erred in attributing the contractor's disposal of the evidence of mold to the insured. The insured felt the adjuster had a duty to recover the disposed evidence. But the insured had a duty under the policy to allow the insurer "to take samples of damaged and undamaged property for inspection, testing and analysis." This became impossible because the allegedly moldy material was thrown into dumpsters, mixing with other construction debris and was not protected from the weather. 

   While dismissal of the claim seemed harsh where the insured apparently lacked some degree of knowledge or control over the initial methods in which the materials were removed and disposed of, it was of greater prejudice to Encompass who had absolutely no control over the evidence.

Insurers' Communications Through Brokers Not Privileged

   The court granted the insured's motion to compel documents withheld for privilege by the insurers. Certain Underwriters at Lloyd's v. Amtrack, 2016 U.S. Dist. LEXIS 27041(E.D. N.Y. Feb. 19, 2016). 

   Plaintiffs were insurers who did business in the London Insurance Market and who issued one or more liability policies issued to Amtrak. Amtrak demanded coverage under the policies for alleged environmental contamination and/or asbestos exposure. Coverage was denied and the insurers filed for a declaratory judgment. 

   Discovery disputes arose in the litigation. Amtrak sought communications deemed privileged by the insurers even though, due to the unique structure of the London insurance market, the communications were shared with third parties.

   Through a declaration,the insurers described how the London insurance market operated. Coverage for a major corporation like Amtrak would involve insurance placed in layers with each policy attaching at the exhaustion point of the underlying policy. A single policy might have one to dozens of insurers.

   To facilitate communications between insurers and their attorneys, the attorneys did not communicate directly with all of the insurers on a policy. Instead, the attorneys communicated with the lead underwriter, and relied on a London broker to make their reports available to all subscribers on a policy who were represented by such counsel. U.S. lawyers representing insurers in the London Market would send attorney reports to a servicing company for the London insurers. The servicing company would then forward the attorney reports to the London brokers, who placed them in a claim file for distribution to the participating insurers. The London brokers would use messengers to take the claims file to various claims handlers, who would review the file. The file was then returned to the broker's office.

   In seeking documents the insurers withheld as privileged, Amtrak argued that because the London brokers were neither attorneys nor clients, the attorney reports through the London brokers waived any privileged. In opposition, the insurers argued that using brokers to distribute privileged communications was standard in the London market and not understood to waive the privilege.

   The court found the documents were not protected by attorney-client privilege. The fact that a particular method of distributing and/or retaining documents was standard in an industry did not determine whether that method of distribution complied with the law governing attorney-client privilege. The insurers failed to establish that attorney-client communications like the attorney reports were distributed through and/or retained by the London brokers were intended to be kept confidential. Amtrak's motion to compel was therefore granted. 

Improper Efficient Proximate Cause Instruction Mandates Reversal

   The court reversed judgment in favor of the policyholder after finding that the trial court erred in giving its jury instruction on the efficient proximate cause doctrine. Citizens Prop. Ins. Corp. v. Salkey, 2016 Fl. App. LEXIS 2840 (Fla. Ct. App. Feb. 26, 2016). 

   The Salkeys had an all-risk homeowners policy from Citizens. The policy contained an exclusion for loss caused by sinkholes, but the Salkeys purchased a sinkhole loss coverage endorsement which provided coverage for "direct physical loss" caused by sinkhole activity.

    The Salkeys presented a sinkhole claim to Citizens. The claim was denied after Citizens determined that the loss was caused by soils in a reclaimed mine zone. The Salkeys then sued for breach of contract.

   At the trial, the parties disputed causation. The Salkeys' expert agreed that the reclaimed mine zone contributed to the damage, but testified that the sinkhole activity was the most substantial factor in the loss. Citizens' expert testified that there was no sinkhole activity and that the damage was caused by soils in the reclaimed mine zone. 

   The jury instructions stated that the burden of proof was on Citizens to prove that all of the damage was caused by conditions excluded by the policy. More specifically, Citizens had the burden to prove that all of the damage was non-sinkhole related. 

   During closing arguments, the Salkeys' attorney emphasized the burden-of-proof instruction, arguing that Citizens had to prove the damage was 100 percent non-sinkhole related. The jury returned a verdict for the Salkeys.

   On appeal, the court ruled that the trial court erred as a matter of law by requiring Citizens to prove that no portion of the Salkeys' loss was sinkhole related. Once the insured proved a loss occurred during the policy period, the burden shifted to the insurer to show that the loss resulted from an excluded cause. Under a first party policy that involved multiple perils, the fact finder had to apply the efficient proximate cause doctrine to determine the cause of the loss. Under the efficient proximate cause doctrine, the jury had to determine which peril was the most substantial factor in the loss. If the efficient proximate cause of the loss was a covered peril, the loss was covered; if it was an excluded peril, the loss was not covered. 

   Here, instead of requiring Citizens to prove that the efficient proximate cause of the Salkeys' loss was an excluded peril not related to sinkhole activity, the trial court imposed a higher burden. It required Citizens to prove that all of the damage was excluded and non-sinkhole related. Therefore, the final judgment was reversed and the mater was remanded for a new trial.

Resulting Loss Provision Does Not Salvage Coverage

   The court confirmed that there was no coverage for damage to the policyholder's building caused by a large volume of water. Praetorian Ins. Co. v. Arabia Shrine Ctr. Houston,  2016 U.S. Dist. LEXIS 20186 (S.D. Texas Feb. 19, 2016).

   The damage occurred when water began seeping through the baseboards of the Shrine. Employees saw a large amount of water entering the building. Eventually, the city shut off a water main valve. It was later determined that an 8 inch diameter fire suppression metal pipe failed at the elbow, causing over one million gallons of water to be released into the building. Damages were estimated at nearly $1.7 million. Clean up and repair costs amounted to $237,156. 

     The Shrine held a commercial property policy. The insurer eventually agreed to pay $62,376. This consisted of $12,376 to remove and replace the pipe, $25,000 for limited additional coverage for water damage under a Masonic Coverage Extension in the policy, and $25,000 for damage to personal property. The insurer then filed suit for a declaratory judgment.

   Under the property policy, there were two coverage requirements. First, the loss or damage had to be to "Covered Property." Second, the cause of the loss or damage must have been from a "Covered Cause of Loss." "Covered Property" included a building and personal property used to maintain the building. "Covered Property" did not include foundations of buildings or underground pipes. 

   The parties disagreed whether the concrete slab that heaved and cracked qualified as a foundation. The court did not reach this issue because the Water Exclusion Endorsement applied. The endorsement stated the insurer would not pay for damage caused by "water under the ground surface pressing on, or flowing or seeping through . . . foundations [or] walls."  

   Nevertheless, the Shrine argued that the ensuing loss clause for sprinkler leakage restored coverage. Under this provision, if sprinkler leakage occurred, the insurer would "pay for the loss or damage caused by . . . sprinkler leakage (if sprinkler leakage is a Covered Cause of Loss)." The insurer argued the ensuing loss provision did not bring coverage back because there was no new loss to property that was not excluded by the policy. 

   The court agreed. The policy required a particular sequence of events. First, an excluded cause of loss had to occur. Then, that excluded cause of lost had to result in sprinkler leakage. Finally, the sprinkler leakage had to cause loss or damage. Here, the second and third steps were missing. Although an excluded cause of loss occurred, there was no evidence that the water under the surface of the ground from the failed pipe "resulted in" sprinkler leakage or that a subsequent sprinkler leakage caused further loss or damage.