Insurance Law Hawaii

California Court Finds Defense Owed Despite "Other Insurance" Clause

  Reliance on the policy's "other insurance" provision did not excuse the insurer from contributing to the defense of a common insured. Certain Underwriters at Lloyds v. Arch Specialty Ins. Co., 2016 Ca. App. LEXIS 275 (Cal. Ct. App. April 11, 2016).

   Lloyds and Arch were both primary insurers of Framecon, Inc. Lloyds issued a CGL policy to Framecon effective October 28, 2000 to October 28, 2001, and another CGL policy effective October 28, 2001 to October 28, 2002. Arch issued a subsequent CGL policy to Framecon effective October 28, 2002 to October 28, 2003. 

   Between 1999 and April 2002, Framecon entered subcontracts to do carpentry and framing work on homes being developed by KB Home. In October 2006, owners of some of the homes sued KB Home for construction defects. Some of the defects were allegedly attributable to Framecon's work. KB Home filed a cross-complaint against Framecon, seeking a defense and indemnity under the subcontracts.

    Framecon tendered the cross-complaint to Lloyds and Arch. Lloyds agreed to defend Framecon under a reservation of rights. Arch refused to defend, relying upon policy language that said it was excess if other coverage applied and Framecon was afforded a defense by another carrier. Lloyds' policy also had an "other defense" provision which stated "coverage provided under this policy is excess over any other collectible insurance . . ." 

   The underlying case settled, with indemnity contributions from both Lloyds and Arch. Lloyds then sued Arch for declaratory relief and equitable contribution for the defense costs incurred in the underlying litigation. The trial court granted summary judgment to Arch.

   The appellate court reversed, finding that Arch also had a duty to defend despite its "other insurance" clause. Public policy disfavored "escape" clauses, where coverage purported to evaporate in the presence of other insurance. The modern trend was to require equitable contributions on a pro rata basis from all primary insurers regardless their "other insurance" clauses. 

   Therefore, Lloyds was entitled to receive equitable contribution from Arch. The trial court erred in granting summary judgment to Arch and in denying summary adjudication to Lloyds. 

Pollution Exclusion Bars Coverage for Inverse Condemnation Action

   The South Carolina Court of Appeals found there was no coverage for an inverse condemnation action based upon the policy's pollution exclusion. South Carolina Ins. Reserve Fund v. E. Richland County Public Service District, 2016 S. C. App. LEXIS 32 (S.C. Ct. App. March 23, 2016).

   In 2010, Coley Brown filed a complaint against the East Richland County Public Service District ("District") for inverse condemnation, trespass, and negligence. The complaint alleged that the District had installed a sewage force main line and an air relief valve on Brown's street, and the valve released offensive odors on his property many times a day. The stench caused Brown to buy a new piece of property and move, but he was unable to sell the old property. The district tendered the complaint to the South Carolina Insurance Reserve Fund ("Fund"), but coverage was denied. 

   The policy's pollution exclusion stated no coverage existed for:

. . . personal injury or property damage arsing out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release, or escape is sudden and accidental. 

    The Fund filed a complaint against the District seeking a declaratory judgment that the Fund had no duty to defend or indemnify the District in the Brown matter. At trial, the District's executive director testified that when the sewage pumps were activated, the air in the main lines was forced out through an air vacuum valve. If this air was not released, the sewer lines would explode. The court ruled the policy's exclusion barring the inverse condemnation claim was valid and enforceable.

   As to the negligence and trespass claims, the court found the pollution exclusions' reference to gases and fumes encompassed the offensive odors delineated in Brown's complaint. The court also determined the discharges of offensive odors were included within the District's ordinary operations. Thus, the pollution exclusion's exception for sudden and accidental releases was inapplicable.

   On appeal, the appellate court found that the pollution exclusion was applicable even though it did not mention offensive odors. The odors could be properly classified as "fumes" or "gasses," both of which were listed in the exclusion. Further the exception in the exclusion for "sudden and accidental" releases did not apply. The District's executive director testified the air release valve was essential to the operation of the sewer line because it prevented the lines from exploding. The pumps usually turned on several times a day. Accordingly, the District's knowledge that the pumps would turn on occasionally was sufficient to demonstrate that the releasing of the odors was not only expected, it was a necessary function of the line's normal operations.

    Thanks to Robert Thomas, fellow Damon Key blogger and inverse condemnation attorney extraordinaire, for the tip on this case.

Business Interruption, Food Spoilage Claims Resulting from Off Premise Power Failure Denied

    The insurer denied the insured restaurant's claim for food spoilage and loss of business income when a flood elsewhere caused a power outage. N. Spy Food Co., LLC v. Tower Nat'l. Ins., 2016 N.Y. Misc. LEXIS 1033 (N.Y. Sup. Ct. March 22, 2016). 

    Tower denied the claim based on an investigation which revealed that the claims resulted from an off premises power failure. The utility company verified that the cause of the power failure was due to flood, a cause excluded under the policy. The food loss and business interruption, therefore, did not result from direct physical loss or damage by a covered cause, justifying the denial of the claim.

    The insured argued that the cause of the loss was not a flood, but the off premise power failure, which was not excluded under the policy. There was no flood at the insured premises. Further, the flood damage exclusion for the insured premises did not apply to premises that was not part of the policy, i.e., premise of the utility company. 

   The policy's exclusions provided:

1. We will not pay for loss or damage caused directly or indirectly by any of the following . . .

  .  .  .  

            g. Water [including flood].

    The court found that this provision excluded losses caused "indirectly" by flood. The fact that the flood occurred at the utility company's substation did not make the exclusion inapplicable. The flood exclusion applied regardless of the location of the flood. Therefore, Tower's motion for summary judgment dismissing the complaint was granted.

Insurers Must Indemnify for Property Loss and Business Interruption

   The insured's motion for summary judgment was granted, paving the way for recovery for property loss and business interruption. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc., 2016 N.Y. Misc. LEXIS 1027 (N.Y. Sup. Ct. March 2, 2016). 

   TransCanada purchased a power plant on August 26, 2008, for generating electricity for the New York metropolitan area. On September 12, 2008, excessive vibrations from Unit 30 required that the unit be shut down. On September 16, 2008, a crack in the unit's rotor was discovered. After repairs, the unit was placed back into service on May 18, 2009. 

   A property policy and combined business interruption coverage was acquired by TransCanada when the plant was purchased. The policy period began August 26, 2008. On September 16, 2008, TransCanada sent a notice of loss, setting forth a gross earnings claim for business interruption losses consisting almost entirely of lost capacity payments from a loss of capacity sales. The insurers filed a declaratory judgment action. 

    TransCanada argued there was a "mechanical breakdown," covered by the policy, that occurred after the policy took effect, that the breakdown was caused by the crack that expanded and caused property damage during the policy period, and that the breakdown constituted an event of physical loss. As a result of the breakdown, TransCanada suffered property damage in the amount of $7 million and a loss of gross earnings in the amount of $50.8 million. The insurers denied coverage on the ground that TransCanada's loss during the policy period was caused by the crack that formed before the policy commenced.

   The court determined it was irrelevant that the crack formed before the policy period. Moreover, the unit was functioning properly until September 12, 2008, despite the crack's pre-existence. The unit did not break down until it experienced the excessive vibrations that day. Therefore, there was no merit to the insurers' argument that the crack caused no damage beyond that which incurred before the policy's commencement. Consequently, the insurers failed to raise an issue of fact as to whether TransCanada's loss was covered under the policy.

   Turning to the business interruption claim, the insurers argued that the period of liability limited coverage for TransCanada's loss of capacity sales to the period between September 12, 2008 and May 18, 2009, as coverage was limited to the actual loss sustained during the period of liability. As Unit 30 was repaired and placed back in operation on May 18,2009, the insurers maintained that any lost capacity sold after May 18, 2009 was not covered.

   The power plant's capacity to produce electricity was sold to utilities at auctions conducted by a New York regulator. The amount that TransCanada received from the auction was determined by the auction price and amount of capacity sold. TransCanada's claim for lost capacity sales was based on capacity sales in the monthly auctions. TransCanada did not receive capacity payments for capacity sold at auction until the sale occurred. The auctions for capacity during the period Unit 31 was shut down for repairs were conducted subsequent to the policy period. Thus, the loss, the decreased capacity, was not realized until the auctions were held. 

   Nevertheless, the court determined that the purpose of business interruption coverage was to reimburse the insured for the amount of profit that it would have earned during the period of interruption had an injury not occurred, and to place it in the position it would have occupied had the interruption not occurred.

    Therefore, the court ordered that the policy covered TransCanada's claim for loss of capacity sales after May 28,2009. 

2016 Hawaii Legislature Enacts Five Insurance-Related Bills

    The 2016 Hawaii legislative session passed five insurance-related bills.  Bills that have been enacted are the following:

    HB 260 - The bill establishes motor vehicle insurance requirements for transportation network companies and drivers that will take effect on September 1, 2016. The Insurance Commissioner is directed to examine the effects of this measure on personal motor vehicle insurance policy rates in the State and submit an annual report to the Legislature. The bill will sunset on September 1, 2021. The measure has been transmitted to the Governor for signature.

    HB 1705 - Electronic insurance cards, in addition to paper cards, are permitted by the bill. The card serves as proof of insurance for motor vehicles and is to be carried in the vehicle at all times. The legislation has been forwarded to the Governor for signature.

    HB 1897 - This legislation ensures that all insurers in the State provide insurance coverage for sexually transmitted disease screenings, including screenings for human immunodeficiency virus and acquired immunodeficiency syndrome. The bill awaits the Governor's signature.

    HB 2084 - All insurers are prohibited from discriminating with respect to participation and coverage under a policy, contract, plan, or agreement against any person on the basis of a person's actual gender identity or perceived gender identity. The bill pends the Governor's signature.

    SB 2851 - Under this bill, the Insurance Commissioner is to determine whether residential property insurance is unavailable due to a moratorium on insurance policies in a lava zone during a state of emergency due to lava flow. The bill has been signed by the Governor. 

 

Court Rejects Insurer's Argument That Two Triggers Required

    The court rejected the insurer's argument that two triggers - one for exposure to asbestos and one for resulting injury - were required under CGL policies. Compass Ins. Co. v. University Mechanical and Engineering Contractors, Inc., 2016 U.S. Dist. LEXIS (N.D. Cal. March 25, 2016). 

    University Mechanical and Engineering Contractors, Inc. (UMEC) was a California corporation in the business of installing plumbing, piping and HVAC systems. UMEC was defending a number of asbestos cases in California state courts arising from its subcontracting work. 

   For May 1, 1981 to May 1, 1982, UMEC had a CGL policy with Compass. There was no dispute regarding coverage obligations for claims where the asbestos exposure and injury happened during the policy periods. The dispute concerned whether Compass also owed coverage for asbestos injury during the policy period caused by asbestos exposure prior the period. Compass argued that the policies required exposure and injury to have happened within the policy terms - in other words, two triggers for coverage. The "Policy Period, Territory" section of the policy stated it applied "only to occurrences which take place during the policy period . . . " Compass read the definition of "occurrence" and the "Policy Period, Territory" sections together to mean that coverage was triggered only when exposure to asbestos and injury both happened within the policy period.

    The court disagreed. The policy words "during the term of this policy" clearly referred to the fact of injury or damage, and not to exposure. Injury or damage was the defining characteristic of an occurrence, and the time limitation of "during the term of this policy" followed and was attached to "injury or damage." By the ordinary meaning of these words, what must "result . . . during the term of the policy" was injury or damage. The event or exposure that caused the injury did not also need to happen within the policy period.

      The insurer's interpretation also contravened well-established California law holding that injury was the trigger of coverage in circumstances like those presented here. California courts specifically treated asbestos and other toxic exposure injury as subject to the continuous trigger rule.

Denial of Coverage For Bodily Injury After Policy Period Does Not Violate Public Policy

    The Rhode Island Supreme Court agreed that the insurer had no coverage obligations for bodily injury occurring after the policy had been canceled. Hoesen v. Lloyd's of London, 2016 R.I. LEXIS 41 (R.I. March 24, 2016).

    The plaintiff, Mark Van Hoesen, was seriously injured on July 23, 2012, when he fell from a deck of his house. He sued his contractor, Brian Leonard, alleging that the deck had been negligently constructed. Lloyd's, Leonard's insurer, was later named as a defendant. Lloyd's admitted it issued the policy to Leonard, but it was cancelled on August 29, 2007. Even if it had not been canceled, the policy had expired long before the injuries alleged in plaintiff's complaint occurred. 

    Lloyd's filed a motion for summary judgment, arguing that it did not insure Leonard for plaintiff's injuries because the policy applied to bodily injury only if the bodily injury occurred during the policy period. The policy issued to Leonard was effective from March 8, 2007, to March 8, 2008. The trial court granted summary judgment to Lloyd's.

     On appeal, the plaintiff argued that, notwithstanding the language in the policy, it contravened a Rhode Island statute. The statute provided, "Throughout the period of registration, the contractor shall have in effect public liability and property damage insurance covering the work of that contractor . . . ." Plaintiff argued that, because the policy covered only injuries that occurred while the policy was in force, and because Lloyd's canceled the policy a few weeks after Leonard finished constructing the deck, the net result was that the policy provided almost no coverage at all, and certainly none to plaintiff. The statutorily mandated coverage was rendered a nullity if coverage could be terminated in the immediate aftermath of the work. 

       The statute, however, imposed no duty on any insurer to provide continuing coverage after the policy period expired. Nor was it a violation of public policy to not require an insurer to provide coverage after the policy period expired or when a contractor failed to honor its obligations under the policy. Even if the injury was caused by Leonard's faulty workmanship, which occurred during the policy period, the "bodily injury" must also have occurred during the policy period for there to be coverage.

   Therefore, the decision of the trial court was affirmed. 

Umbrella Policy Must Drop Down to Assist with Defense

       The court determined that an umbrella carrier was obligated to assist the general liability insurer in defending the insured. Am. States Ins. Co. v. Insurance Company of the State of Pennsylvania, 2016 U.S. Dist LEXIS 38128 (E.D. Cal. March 23, 2016). 

       Sierra Pacific Industries obtained rights to timber harvesting operation on a parcel of land in northern California. Sierra hired Howell's Forest Harvesting to perform certain timber harvest operations under the terms of a logging agreement. The logging agreement required Howell to obtain a CGL policy and to name Sierra as an additional insured.

       In September 2007, a fire ignited while Howell was working in the area, and eventually burned 65,000 acres of land. Sparks caused by Howell's bulldozers allegedly caused the fire. Multiple lawsuits were filed against both Sierra and Howell.

       American States issued a CGL policy to Howell which included Sierra as an additional insured. Coverage was afforded to Sierra, however, "only to the extent Sierra is held liable due to: . . . Howell's ongoing operations for Sierra." Therefore, coverage was limited to Sierra's vicarious liability as to Howell, and Sierra's independent liability was not covered. 

      Sierra also hds an umbrella policy with Pennsylvania. The policy provided excess insurance when Sierra was vicariously liable with Howell and American States' policy limits were exhausted by payment of claims. Further, Pennsylvania's policy provided umbrella, or primary, coverage when property damage arose from Sierra's non-vicarious liability with Howell pursuant to American State's CGL policy.

       After the underlying suits were filed, Sierra tendered to both American States and Pennsylvania. American States accepted the defense. Pennsylvania did not defend Sierra. 

       The fire-related suits against Sierra settled, exhausting both American State's and Pennsylvania's respective policy limits. 

       American States then sued Pennsylvania for equitable contribution of defense costs paid to Sierra. The parties filed cross-motions for summary judgment.

       The court found that Pennsylvania had a primary duty to defend Sierra. Under the CGL policy, American States was required to defend Sierra only to the extent Sierra was vicariously liable with Howell. Conversely, Pennsylvania's umbrella policy covered Sierra for any suit seeking damages for property damage which was not covered by American State's policy. Pennsylvania's policy therefore dropped down and became primary coverage for suits in which Sierra was independently liable for property damage. 

       In the underlying cases, plaintiffs alleged that Sierra could have been independently liable for the fire because of Sierra's responsibility to suspend operations in certain weather conditions. Thus, Pennsylvania's duty to drop down and defend as a primary insurer under the umbrella policy could have been triggered by claims in the underlying lawsuits. 

       Therefore, American State's motion for summary judgment was granted while Pennsylvania's motion was denied.