Insurance Law Hawaii

Insurer Must Defend Construction Defect Claims

    The federal district court found that under New York law, the insurer had a duty to defend construction defect claims where damage to property other than the insured's work product was possible. Am.Home Assur. Co. v. Allan Window Techs., 2016 U.S. Dist. LEXIS 101118 (S.D. N. Y. Aug 2, 2016).

    Kent Avenue Property ("Kent") sued Allan Window Technologies, Ltd. ("Allan"), alleging that Allan entered a written contract for the design, manufacture, assembly and installation of the window wall systems for a residential condominium building. Pursuant to the contract, Allan agreed to correct all work rejected as defective and to bear all costs for correcting the work. According to the complaint, the window wall systems and vent windows installed by Allan were not water-tight or air-tight, and therefore did not meet the air and water penetration requirements of the contract.The contract had an indemnification provision under which Allan agreed to indemnify, defend and hold harmless Kent from all losses, claims, lawsuits, etc. arising out of damage or injury to property at the project site. Kent sued for: (1) breach of contract; (2) breach of warranty, and (3) contractual indemnity. 

    American Home agreed to defend Allan under a full reservation of rights. American Home then sued for a declaratory judgment to establish it had no duty to defend or indemnify. 

    The parties agreed that American Home provided coverage for liability assumed in an "insured contract." There was no doubt that under the contract's indemnity provision, Allan assumed the tort liability of Kent. However, liability assumed in an "insured contract" was only covered if damages to which the policy applied were alleged. The damages therefore had to stem from "property damage" caused by an occurrence.

    New York courts held that a CGL policy did not insure against faulty workmanship in the work product itself but rather faulty workmanship in the work product which creates a legal liability by causing property damage to something other than the work product. American Home claimed that the relief sought in the underlying complaint was only for costs associated with the repair or replacement of the window wall systems and vent windows constructed by Allan. 

   In the underlying complaint, however, Kent alleged it had received claims from condominium unit owners and the condominium association arising out of defects in the windows designed, manufactured and installed by Allan. The substance of the claims was not further described. Kent further asserted that under the indemnity provision, Allan was liable for any lawsuit arising out of the condominium unit owners'and association's claims.

    From the allegations, it was unclear whether the claims for which Allan was liable were related to damages to the window wall systems themselves, or to other property owned by the condominium unit owners/condominium association. It was possible that some or all of the claims alleged in the underlying complaint were for tort damage caused to third-party property, distinct from Allan's work product. Because American Home could not reasonably claim that the underlying allegations allowed for no interpretation that the unit owners' claims related to third-party property damage, and thus fell within the policy's coverage, the court could not conclude that American Home did not have a duty to defend Allan.

    Therefore, American Home's motion for summary judgment was denied. Not only did it have a duty to defend, it was too early to determine whether American Home had a duty to indemnify. 

Ninth Circuit Finds Intentional Acts Exclusion Ambiguous

    In a brief memorandum opinion, the Ninth Circuit found the policy's intentional acts exclusion was ambiguous. Berns v. Sentry Select Ins. Co., 2016 U.S. App. LEXIS 13684 (9th Cir. July 27, 2016).

    The insured's employee misappropriated company files. The employee was scolded and terminated. She then sued the insured. The tender to Sentry was denied based upon the policy's intentional acts exclusion. 

    The district court granted summary judgment to Sentry. On appeal, Sentry argued that"intentional" unambiguously meant "voluntary and deliberate". Given California precedent interpreting the term "intentional," the Ninth Circuit found this position untenable. The exclusion precluded coverage for "[a]ny dishonest, malicious, fraudulent, criminal or intentional act." Sentry's position that the term "intentional" broadly applied to any "voluntary" or "deliberate" act conflicted with common principles of policy interpretation. Where general words followed an enumeration of specific items, the general words were read as applying only to other items akin to those specifically enumerated. Here, the term "intentional" followed far more specific words ("dishonest," "malicious," "fraudulent," and "criminal") that described particularly blameworthy conduct. The term "intentional'" had to be read in light of these terms and therefore required some sort of wrongful conduct, not just any purposeful act. 

    Further, California cases inconsistently interpreted the term "intentional." Some cases adopted Sentry's broad interpretation of the term. Others adopted the insured's view that "intentional" required a specific intent to cause harm. The California Supreme Court had written that the word "intentional" may have a "built-in ambiguity." Gray v. Zurich Ins. Co., 419 P.2d 168, 174 (Cal. 1966). 

    The court therefore rejected Sentry's interpretation of the exclusion. Construing the ambiguity in favor of the insured, the "intentional" acts exclusion applied only if the insured acted with a specific intent to wrongfully inflict injury. Because the insured may not have acted with the requisite intent in terminating the employee to come within the exclusion, Sentry had a duty to defend. 

    The district court's order granting summary judgment to Sentry was reversed and the matter was remanded for further proceedings. 

    Thanks to co-Damon Key blogger, Mark Murakami, for flagging this case. 

Business Risk Exclusions Do Not Bar Duty to Defend

    In a sensitive opinion incorporating several redactions, apparently due to national security issues, the court found that the business risk exclusions raised by the insurer did not apply in determining whether there was a duty to defend. Innovative Mold Solutions v. All Am. Ins. Co., 2016 U.S. Dist. LEXIS 91671 (D. Mass. July 12, 2016).

   Innovative Mold Solutions (IMS) was a subcontractor of ITT Power Solutions, which was awarded a contract by the United States Army to develop the product. IMS was to manufacture the molded components of the power supply assembly of the product. At some point, ITT Power Solutions employees began to notice that defective power supply cases were being shipped from IMS. The defects included bubbling, flaking, and burn marks on the plating of the cases. ITT Power Solutions refused to disclose the defects. Michael Ladas, the director of quality at ITT Power Solutions, was terminated after he attempted to disclose the defects.

     IMS was sued in a qui tam False Claims Act (FCA) suit brought by Ladas. The complaint alleged that IMS had violated the FCA by manufacturing contractually noncompliant and defective components of an undisclosed product, which were provided to the United States. IMS tendered its defense to All America, but the defense was denied  based on the allegations in the Ladas complaint.

    Ladas eventually settled with IMS for $25,000. But IMS spent more than $400,000 in defending the allegations in the Ladas complaint. IMS sued All American, seeking a declaratory judgment that All American had a duty to defend.

    The court first determined that the Ladas complaint alleged "property damage." IMS allegedly used faulty epoxy which potentially caused damage to components that were supplied by other entities. The court also found the Ladas complaint alleged an "occurrence." The Ladas complaint did not conclusively establish that the results of changing the epoxy process were not accidental.

    Turning the business risk exclusions, All American relied upon Exclusions J (6) which applied to the costs of repairing damage to other aspects of an overall project, if the costs were directly caused by a subcontractor's faulty work. The exclusion did not apply to "property damage" included in the "products-completed operations hazard," however. The products-completed operations hazard included "all . .  'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work.'"

    Here, IMS's work was itself a component part of a larger product. The complaint did not allege that IMS's faulty work caused damage to any third-party. This was distinguishable from a scenario in which the insured's negligent work on a project caused damage to third-party property that was not part of the overall project, in which case the faulty-workmanship exclusion would not apply.

    Nevertheless, the J (6) exclusion did not apply to property damage included in the products-completed operations hazard. According to the Ladas complaint, the weak adhesion could appear satisfactory at first but then would develop damage as the product was exposed to various temperatures, moisture, and electrical power. Thus, the latent nature of the alleged damaged suggested that much of it did not occur until the products had left IMS's facilities.

    Therefore, the Ladas complaint alleged that property damage may have occurred away from IMS's premises, arising out of IMS's product or work. This damage would be covered by the products-completed operations hazard, which meant that it would not be subject to the J (6) exclusion.

    Accordingly, All America had a duty to defend.

Bad Faith Damages Awarded for Claims Handling

    The insureds prevailed at trial in securing an award for bad faith due to the insurer's unreasonable handling of the claim. Taladay v. Metro. Group Prop. & Cas. Ins. Co., 2016 U.S. Dist. LEXIS 87659 (W.D. Wash. July 6, 2016).

    Rosemarie Taladay had a homeowners policy with MetLife. After her death, one of her three sons, Gary Taladay, was living with her in the home when a fire occurred in an upstairs attic room. An investigation determined that most of the fire damage was in the attic bedroom, but water damage from the fire department's efforts to extinguish the fire was present on the first floor as well. The MetLife policy generally excluded water damage, but direct loss ensuing after water damage "caused by fire" was a covered cause of loss. 

    Gary Taladay had difficult discovering the identity of the insurer, MetLife. He signed two contracts for emergency services with Heritage Restoration after informing the company that he did not know the identity of the insurer and could not afford to pay for the mitigation work on his own. Heritage removed salvageable items form the house and attempted to assist in locating Ms. Taladay's fire insurance policy. Gary Taladay reported the fire to the mortgage company, Chase, but Chase refused to identify the insurance company. 

    Gary Taladay could not live in the house due to the fire damage and began living in an inexpensive motel. He was unable to afford both the motel bill and mortgage, so the mortgage was placed in default by Chase. 

    The policy was eventually located and MetLife was notified. MetLife investigated, but delayed making any payments until suit was filed. MetLife contended that it did not unreasonably deny coverage because the insureds failed to mitigate the loss to the first floor, failed to timely submit receipts for the additional living expenses, and failed to timely submit a properly completed Proof of Loss form with an inventory of unsalvageable personal property to enable Met Life to adjust the claim.

    MetLife repeatedly misrepresented to the insureds that the adjustments of their entire claim, including structure damage and alternative living expenses, were contingent upon presentation of a complete inventory of damaged personal property. But at trial, numerous witnesses from MetLife testified that MetLife was able to adjust the structure portion of the claims and the alternative living expenses without the inventory of damaged personal property. MetLife compelled the insureds to file suit to recover for repair estimates was also contrary to Washington law. 

    MetLife also unreasonably modified the insureds' contractor's estimates of repair related to gutting the first floor of the house. This greatly reduced funds available for the insureds to make necessary repairs and made it impossible for the insureds to find a contractor willing to complete the work. Because the insureds could not make the repairs, Chase foreclosed on the house. MetLife not only wrongfully denied coverage for the repairs, but never communicated the denial to the insureds.

    After suit was filed, MetLife paid a portion of the claim. The remaining issue, therefore, was whether MetLife's substantial delay in making the payment was reasonable. The MetLife adjuster created an inventory the second day he visited the property, listing approximately 140 items in the attic that were damaged by the fire. He withheld his inventory list from the insureds because they had not yet generated their own complete inventory of damaged items. The adjuster said he was waiting for a signed Proof of Loss form to be submitted by the insureds. A partially completed Proof of Loss form was submitted on September 3, 2014 by Gary's brother, Denny Taladay. In the section requesting estimates of "Actual Cash Value" of the property, Denny wrote "unknown." MetLife therefore refused to adjust the claim and refused to issue any payments until a completed inventory was received. 

    Only after suit was filed did MetLife finally pay $91,771 for additional loss under the claim.The court found this unreasonable. The adjuster had concealed his inventory of personal property items from the insureds even after the insures informed him that they needed a professional to assist with the inventory. MetLife failed to provide the insureds with reasonable assistance, contrary to Washington law. Consequently, MetLife breached the duty of good faith. The court awarded $254,770, plus attorneys' fees for actual and punitive damages.

Insurer's Subrogation Rights Confirmed

    The First Circuit reversed the District Court's holding that the insurer's subrogation rights were waived based on a clause in the condominium's bylaws. Pacific Indemnity Co. v. Deming, 2016 U.S. App. LEXIS 12374 (1st Cir. July 5, 2016).

    Deming rented a unit in the condominium under a lease with the unit's owners. He fell asleep after turning on the bathtub faucets. The water from the bathtub overflowed and leaked into the condominium units below, causing considerable damage. Pacific, which insured Deming's unit, paid $351,159.09 to the unit's owners as a result of the damage.

    Pacific sued to recover the amount it paid to the owners. Pacific pled that under its policy and by operation of law, it was subrogated to the owners' rights against Deming for the damages. Deming filed a motion for summary judgment, arguing that the waiver of subrogation contained in Pacific's policy was enforceable and prohibited Pacific's claim. Deming relied upon the bylaws, which provided that each unit owner would carry insurance at its own expense and that all such policies would contain waivers of subrogation. Deming argued that by agreeing to the requirements of the condominium association, Pacific's insured purchased a policy that permitted waiving the right of subrogation.

    In its cross motion for summary judgment, Pacific argued that as a tenant, Deming could not establish there was a contractual impediment to Pacific's pursuit of a subrogation claim. The policy language, which provided that the insured "may waive any rights of recovery from another person for a covered loss in writing before the loss occurs," was not self-effectuating, but rather authorized insureds to enter into separate agreements which waived subrogation against particular persons. Deming was not such a person who received a pre-loss waiver.

    The district court granted Deming's motion and denied Pacific's cross-motion. The court determined that the bylaws required unit owners to obtain an insurance policy that "shall" contain a waiver of subrogation and concluded that the provision applied to tenants.

    The First Circuit reversed. Nothing in the record suggested that the owners actually waived their insured's subrogation rights. The bylaws required unit owners to procure insurance that contained waivers of subrogation. Pacific's policy stated that an insured could waive any rights of recovery from another person for a covered loss in writing before the loss occurred. But nothing in these documents amounted to an actual waiver of subrogation. Pacific's policy merely gave the insured the option to waiver rights of recovery, but could not be read as a waiver of subrogation. The only way to read the bylaws as constituting a waiver of subrogation was to read the requirement to purchase insurance with a waiver of subrogation as itself being a waiver of subrogation. This reading, however, was contrary to the plain text, and was rejected by the court.

    Therefore, Pacific was not subject to a waiver of subrogation and could pursue its claims against Deming.

Determining Duty to Defend in Wisconsin Does Not Include Extrinsic Evidence

    The policyholder's  attempt to extend the duty to defend analysis beyond the complaint's allegations and the four-corners of the policy failed before the Wisconsin Supreme Court. Water Well Solutions Service Group Inc. v. Consolidated Ins. Co., 2016 Wisc. LEXIS 163 (Wis. Sup. Ct. June 30, 2016). 

    Waukesha Water Utility contracted with Water Well Solutions to remove an existing pump, install a new pump, and complete reinstallation of the pump. After the job was completed, the well pump unthreaded from a pipe column and fell to the bottom of the well. 

    Waukesha's insurer, Argonaut Insurance Company, sued Water Well, seeking $300,465.48 in subrogated damages. Water Well tendered its defense to its insurer, Consolidated. The tender was denied based upon the "Your Product" exclusion in the policy. 

    Water Well settled with Argonaut for $87,500 and then filed suit against Consolidated. The complaint alleged that Consolidated acted in bad faith by refusing to defend. The trial court granted Consolidated's motion for summary judgment. Comparing the allegations in Argonaut's complaint with the policy provisions convinced the trial court there was no duty to defend. The trial court refused to consider Water Well's extrinsic evidence to show that its subcontractor's work on the preexisting pipes triggered coverage under the policy. The court of appeals affirmed.

    On appeal, the Wisconsin Supreme Court rejected Water Well's request to create an exception to the four-corners rule by considering extrinsic evidence. Wisconsin applied the four-corners rule, without exceptions, in duty to defend cases because it generally favored insureds.

    The court also determined that the "Your Product" exclusion applied to bar coverage. The Argonaut complaint contained no allegation that any damage occurred to anything other than Water Well's product. Water Well argued an inference could be made from the allegations in the complaint that damage occurred to pre-existing pipes that would not fall within the "Your Product" exclusion. The court, however, saw nothing in the Argonaut complaint suggesting that any pre-existing products, including pre-existing pipes, were damaged.

    Consequently, coverage was barred and Consolidated did not breach its duty to defend.

    The Hawaii case law on duty to defend is more liberal that that of Wisconsin because extrinsic evidence in the insured's favor is considered when determining whether there is a duty to defend. See Dairy Roads Partners v. Island Ins .Co., Ltd., 92 Haw. 398, 422, 992 P. 2d 93, 117 (2000).

Insurer Must Defend Injury Caused by Shooting of Gun Thought to be Unloaded

    The court denied the carrier's motion for summary judgment, seeking to establish it had no duty to defend or indemnify. Allstate Ins. Co. v. Tarantino, 2016 U.S. Dist. LEXIS 81713 (D. Conn. June 23, 2016).

    The insured's son was at a friend's house. He found an air gun, aimed the gun at the floor and pulled the trigger several times. Gas was released from the gun, but no pellets fired. The boy then went to where his friend was lying down to "startle and/or waken" the friend by pulling the trigger, which would cause the release of gas and a firing sound. The insured's son did not believe the gun was loaded. He pulled the trigger several times, releasing gas. One pull, however, released a pellet from the air gun and struck the other boy in the left eye.

    The insured was sued for negligence. Allstate defended, but filed an action for declaratory judgment. Allstate moved for summary judgment arguing: (1) the complaint did not allege that the injuries were caused by an "occurrence" and (2) even if the complaint did allege an occurrence, the "intentional or criminal acts" exception applied to bar coverage.

    Allstate argued the injuries did not arise from an occurrence because they were the direct and foreseeable consequence of an intended mechanical act (pulling the trigger), regardless of whether the boy acted with a subjective intent to cause physical harm.

    The court found that taking into account the subjective intentions of the insured person when determining whether an incident was an "occurrence" was the most logical way to reconcile the provisions in the policy. After stating it covered bodily injury "arising from an occurrence" subject to certain exceptions, the policy excluded bodily injury "intended by, or which may reasonably be expected to result from the intentional or criminal acts or omissions of, an insured person." The "reasonably expected" language was clearly intended to encompass foreseeable injuries. Thus, it must be possible for the coverage of injury arising from "occurrences" to include bodily injury foreseeably arising from some intentional or criminal acts in an accidental way, or there would be no need to exclude coverage for such situations.

    Here, the complaint alleged the insured's son intended to engage in the mechanical acts leading up to the shooting: he "pulled the trigger of the air gun a number of times while in close proximity to where his friend was lying on the couch so it would make a loud firing noise and startle his friend." but there was no allegation that the boy subjectively intended to shoot his friend or otherwise cause him any physical harm. Carelessness and poor judgment did not exclude negligent conduct from coverage. Therefore, the court found, for purposes of the duty to defend, there was an "occurrence" that could be covered by the policy.

    Allstate argued if there was an "occurrence," the exclusion for "any bodily . . . intended by, or which may reasonably be expected to result from the intentional acts or omissions of an insured person," applied to bar coverage. The exclusion meant that an objective test applied. Applying the objective standard, a jury could find that a reasonable person would not have expected bodily injury to result from a gun that had been shot empty of its pellets.

    Therefore, Allstate did not show that the injury, as alleged in the complaint, fell squarely within the exclusion. Allstate's motion for summary judgment was denied with respect to its duty to defend. It was premature to rule on Allstate's duty to indemnify.

Presentation on Coverage for Construction Defects

    I am invited to speak before the Honolulu Association of Insurance Professionals at the monthly meeting September 13, 2016. The topic will be "Coverage for Construction Defects - Hawaii Departs from the Emerging Trend."

    The meeting will be at the Island Insurance Meeting Hall, 1022 Bethel St., Honolulu. All are invited, but please RSVP to pr@haipro.org. by September 6, 2016.