Insurance Law Hawaii

Insurer's Daubert Challenge to Insured's Expert Partially Successful

    The insurer was partially successful in challenging two of the insureds' experts in a bad faith case. Estate of Arroyo v. Infinity Indem. Ins. Co., 2016 U.S. Dist. LEXIS 115669 (S.D. Fla. Aug. 29, 2016). 

    The Estate sought to qualify two experts, Lewis N. Jack and James P. Schratz. They were to opine on Infinity's handling of the Estate's insurance claims and the extent of damages warranted in the case. Jack was to testify on Infinity's duties to the insured, its investigation of the case, its reliance on Infinity's agents, and his belief that Infinity could have settled the case. Schratz's opinions mostly concerned Infinity's handling of its investigation. 

    Jack had practiced law for over forty years and had advised insurance companies about claims handling and complying with Florida's insurance provisions. But he had no experience in personally handling claims, had not published any materials on the subject, and was unfamiliar with guidelines from the Florida Department of Insurance. His insurance law specialty did not qualify him to opine as an expert on Infinity's handling of the Estate's insurance claims. Further, Jack's opinion about the reasonableness of damages was unreliable since his conclusions related to damages in a separate state court action involving the passenger in the decedent's automobile. Therefore, all of Jack's opinions would be excluded.

    Schratz was a licensed attorney who currently consulted with  clients on claims handling techniques and procedures. He spent thirteen years working in various capacities, including claims handling, with Fireman's Fund. He had published several articles on claims handling during his thirty years of relevant experience. Therefore, Schratz was qualified to opine on national industry standards of insurance company claims handling and investigation processes, and how Infinity applied them in this case. 

    Some opinions from Schratz, however, would be inadmissible. Schratz could not mention the equal consideration doctrine, or describe the doctrine as the "industry standard" as he did in his deposition. There was no evidence that the doctrine had been formally applied in Florida. And while Schratz could cite to the problems with Infinity's claims handing and any of their agents' alleged missteps, he could not intimate a motive or intent to any of these actions. Therefore, any mention of Infinity "totally ignoring and disregarding the interest of its insured" and that its agent "made material misrepresentations" was barred. 

Pro Bono Service Recognized

 

Our firm, Damon Key Leong Kupchak Hastert, was recognized yesterday by the Hawaii Supreme Court for its pro bono service. 

Insurer's Withheld Discovery Must be Produced in Bad Faith Case

    The United States District Court for the Western District of Washington granted the insureds' motion to compel and ordered that the insurer produce withheld discovery. Bagley v. Travelers Home & Marine Ins. Co., 2016 U.S. Dist. LEXIS 115028 (W.D. Wash. Aug. 25, 2016).

    The insureds' dock and boat ramp were damaged in a storm. Travelers refused to pay for the damage, arguing it was not covered. After Plaintiffs filed suit, Travelers admitted coverage and agreed to pay. The insureds' suit included a claim that Travelers wrongfully denied coverage, thereby costing the insureds money.

    The insureds moved the court to compel Travelers to respond to certain discovery requests. First, the insureds requested the claims file Travelers maintained on their claim. The court did not order the production of privileged documents, but documents related to claims handling were not privileged. Travelers was ordered to produce all documents in the insureds' claim file that related to claim handling, even if the documents were created after the commencement of litigation.

    Next, the insureds requested Travelers' training materials and claim manuals. Travelers argued that because the insureds' policy was a homeowner's policy, materials and manuals on property insurance in general were unlikely to lead to admissible evidence. The court disagreed. Because the insureds alleged bad faith, Travelers' materials and manuals on property insurance and claim handling in general were relevant. Travelers had materials on "Property Best Practices," "Introduction to Property," "The Life of the Claim," and "The Property Claim Determination Process" among other relevant topics. These materials could shed light on how Travelers instructed its adjustors to investigate, evaluate, and process a claim like the insureds.

    The insureds alleged that Travelers tied the bonuses of its claim department employees to low claim payouts. Therefore, the insureds' requested that Travelers produce documents related to its employees compensation. The court held that the insureds were entitled to discovery of all documents relevant to the compensation program, including those that related to top-level employees who allegedly rewarded managers and the adjustors they supervised.

    Travelers was also ordered to produce personnel files for all personnel working on their claim. This included reviews, disciplinary information, and compensation information.

    Finally, the insureds sought "financial documents that evaluate the effect of reduced claims payments to Travelers' bottom line." Travelers argued the request was vague or unlikely to lead to admissible evidence. The insureds alleged that Travelers tracked information regarding the claim payouts of its offices nationwide and used this data to encourage certain claim handling behavior. Documents that confirmed the existence of such a program would be relevant to the insureds' claim. Therefore, Travelers was ordered to produce loss ratio and other profit information.

Damages to Property That is Not the Insured's Work Product Are Covered

    Reversing the district court, the Eighth Circuit predicted that under Iowa law, damage to property other than the insured's work product was covered. Decker Plastics Inc. v. West Bend Mut. Ins. Co., 2016 U.S. App. LEXIS 15235 (8th Cir. Aug. 19, 2016). 

    A 1's, Inc. packaged and sold landscaping materials. Decker Plastics Corporation sold plastic bags to A 1's. The plastic bags were filled with sand and rock, and stored outdoors for sale to customers. Because Decker failed to manufacture the bags with an ultraviolet inhibitor, the bags deteriorated in the sunlight. This caused small shreds of plastic to commingle with A 1's landscaping materials. The plastic was a contaminant that could not be inexpensively separated form A 1's products. A 1's had to clean spilled materials from customer sites, purchase replacement bags from another supplier, and pay to clean up its own property. 

    A 1's sued Decker to recover its losses. Decker and A 1's settled, and Decker filed a claim with its CGL carrier, West Bend. The claim was denied. Decker sued, but the district court granted summary judgment to West Bend because there was no "occurrence" under Iowa law. Under Pursell Constr., Inc. v. Hawkeye-Sec. Ins. Co., 596 N.W. 2d 67 (Iowa 1999), defective workmanship standing alone, resulting in damages only to the work product itself, was not an occurrence under a CGL policy. The district court held that A 1's claimed losses against Decker was foreseeable and the expected consequences of Decker's defective workmanship.  

    The Eighth Circuit reversed. Decker's defective bags were sold to its customer, A 1's, which then used the bags to store its own property, landscaping materials. The defective bags unexpectedly deteriorated, causing damage to A 1's other property. The deterioration of the bags was the covered occurrence. Under Pursell, the occurrence was "a misfortune with concomitant damage to a victim [A 1's], and not the negligence [of Decker] which eventually result[ed] in that misfortune." The covered property damage was to A 1's property other than the bags.

    Therefore, the Eighth Circuit predicted that the Iowa Supreme Court would limit its hold in Pursell to cases where the alleged "occurrence" was defective workmanship standing alone, that is, resulting in damages only to the work product itself. 

ISO Proposes New Designated Premises Endosement in Response to Hawaii Decision

   The Insurance Services Office (ISO) has issued a Circular advising it will submit to Insurance Departments in various states proposed changes to the Designated Premises Endorsement. The changes are due in part to the Hawaii Supreme Court's decision in C. Brewer & Co. v. Marine Indem. Ins., 135 Haw. 190, 347 P. 3d 163 (Haw. 2015). (Full Disclosure - our office represented C. Brewer before the Hawaii Supreme Court). 

   Currently, the endorsement provides,

This insurance applies only to "bodily injury", "property damage", "personal and advertising injury" and medical expenses arising out of:

1. The ownership, maintenance or use of the premises shown in the Schedule and operations necessary or incidental to those premises; or

2. The project shown in the Schedule. 

   The Circular gives the background of the C. Brewer case. An earthen dam burst, killing 7 people and causing property damage downstream. Suits against C. Brewer included claims of "negligent corporate decisions." The policy's Designated Premises Endorsement listed the corporate headquarters in the schedule under "Premises," but did not list the dam. 

   In addressing the endorsement, the Hawaii Supreme Court ruled that the endorsement "provides coverage for injury and damage that occurs on premises not listed in the schedule if the injury arises out of the ownership, maintenance or use of a designated premises."  The Court went on to state that the term "arising out of the 'use' of the designated premises requires that there be a casual connection between the injuries. . . and the designated premises."  

   One of the endorsement's revisions was to delete language specifically referring to injury or damage arising out of the "ownership, maintenance or use of the premises shown in the schedule": 

This insurance applies to "bodily injury" and "property damage" caused by an "occurrence" that takes place in the "coverage territory" only if:

1. The "bodily injury" or "property damage":

(A) Occurs on the premises shown in the Schedule or the grounds and structures appurtenant to those premises; or

(B) Arises out of the project or operation shown in the Schedule.  

    Therefore, the proposed endorsement explicitly provides that "bodily injury" or "property damage" must occur on the premises shown in the Schedule or the grounds and structures appurtenant to those premises. 

Pollution Exclusion Bars Coverage for Damage Caused by Tar Escaping From Roof

    The insurer prevailed on summary judgment establishing it had no duty to defend the insured roofing contractor for damage caused by tar escaping from a roof. Mesa Underwriters Spec. Ins. Co. v. Myers, 2016 U.S. Dist. LEXIS 108444 (W.D. Ohio Aug. 16, 2016).

     Myers contracted to do roofing work for Sireco III LLC. Myers removed stones from the roof, patched all bad sections, and sealed the roof. To seal the roof, Myers used a roofing-tar sealant. The substance was a skin irritant and harmful or fatal if swallowed.

    Myers expected the sealant to harden within twenty-four hours. When rain hit the area eleven days later, however, it washed the sealant off the roof and into the downspouts. It then flowed into the city's sewer system and eventually into Lake Erie.

    The Ohio Environmental Protection Agency notified Myers, and he hired SpillTek Environmental Services, LLC to remediate the damage. Myers also notified his insurer, Mesa. Mesa refused to cover the remediation and after four days, Myers ordered SpillTek to halt its work. After being warned it was being considered a responsible party, Sireco hired SpillTek to finish the cleanup work. Sireco hired another company to remove the sealant remaining on the roof.

    Sireco sued Myers, alleging he breached the contract and was negligent in failing to use the proper sealant. Mesa refused to defend or indemnify, contending that the underlying suit alleged defective workmanship. Mesa recognized it might have had to cover the consequential damages Sireco sought, i.e, the clean-up costs incurred to capture the sealant that entered Lake Erie. But Mesa determined that the policy's Total Pollution Exclusion applied.

    Mesa filed suit for a declaratory judgment. A prior Ohio case held that claims of defective construction or workmanship were not claims for property damage caused by an occurrence under a CGL policy. Westfield Ins. Co v. Custom Agr. Sys., Inc., 133 Ohio St. 3d 476 (2012). Westfield held that truly accidental property damage generally was covered. Conversely, faulty workmanship claims generally were not covered, except for their consequential damages, because they were not fortuitous.

    Therefore, the cost of remediating the roof was not covered. Where the damages claimed were the cost of correcting the work itself, there was no coverage. But the policy did cover the consequential damages that stemmed from the insured's work and the damage caused to the water system. Here, however, the pollution exclusion applied. The roofing sealant was a pollutant under the policy. Sireco's remediation costs stemmed from the dispersal, seepage, release and/or escape of the sealant from the roof and into Lake Erie.

    Therefore, Mesa's motion for summary judgment was granted.

Insurer Granted Summary Judgment on Faulty Workmanship Claim

    The federal district court found no coverage for the insured developer after water intruded into the homeowners' basements. W. Bend Mut. Ins. Co. v. Cleland Homes, 2016 U.S. Dist. LEXIS 108030 (N.D. Ind. Aug. 16, 2016). 

    The underlying complaint alleged that the subdivision was designed to create a run off of ground water onto the lots where Cleland built plaintiffs' homes. The design of the subdivision and construction of the homes was defective in that the plaintiffs' homes were situated so that the water table underneath their homes was so high that their basements flooded and damage occurred to the structure of their homes. Cleland was allegedly negligent in designing and/or constructing the homes or negligent in the water drainage plan for the subdivision. 

    West Bend filed suit for declaratory judgment against Cleland and the homeowners. Cleland did not participate in the coverage litigation. Cross motions for summary judgment were filed.

   West Bend first argued the contractual liability exclusion barred coverage. West Bend contended in the absence of obligations assumed under the sales contracts, Cleland would have no liability to the homeowners for the diminished value or structural damage claims. But West Bend failed to provide copies of such sales contracts as part of its motion. The court declined to grant summary judgment based on inferences regarding duties from an unknown sales contract. It was possible that Cleland was not even a party to the sales contracts.

    West Bend's second argument based upon the "your work" exclusion was more successful. The exclusion provided that the policy did not apply to "'Property damage' to 'your work' arising out of it or any part of it and included in the 'products completed operations hazard.'" The exclusion did not apply if the damaged work or the work out of which the damage arose was performed on the insured's behalf by a subcontractor. The court explained that, in simplified terms, the products completed operations hazard was defined as bodily injury or property damage that occurs away from premises that the insured owns or rents, and which arises from the insured's work. Thus, property damage to a completed home sold by the insured to a third party which was caused by the insured's work would be included in the "products completed operations hazard." The homeowners' claimed property damage, consisting of erosion under the foundations and decreased homes values, was property damage to Cleland's completed work caused by Cleland's faulty construction. 

    The homeowners argued that the concrete basement/foundations for the homes was poured by a subcontractor. Therefore, the exception to the your work exclusion applied. 

    The court rejected the homeowners' argument. The homeowners were alleging that the subdivision was designed with a negligent drainage plan creating a run-off of water onto their properties. The allegations did not point to any defective work performed by the subcontractor, and the damaged work was the houses as a whole, because erosion was occurring under their foundations. Further, the homeowners did not have any evidence that the subcontractor had any part in Cleland's decision to site every home in their locations so as to create the water problems. 

    Consequently, West Bend's motion for summary judgment was granted while the homeowners' motion was denied. 

Following Hawaii's Lead, Excess Carrier Allowed to Pursue Equitable Contribution from Primary

    Citing the Hawaii Supreme Court's decision in St. Paul Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co., 135 Haw. 449, 353 P.3d 991 (2015), the California Court of Appeal determined that the excess carrier could pursue an equitable subrogation action alleging that the primary insurers' unreasonable failure to settle within policy limits resulted in a settlement exceeding policy limits, thereby damaging the excess carrier. Ace Am. Ins. Co. v. Fireman's Fund Ins. Co., 2016 Cal. App. LEXIS 647 (Cal. Ct. App. Aug 5, 2016).

    John Franco suffered serious injury in a special effects accident while working on a film set. He and his wife sued Warner Brothers Entertainment, Inc. and related entities. Fireman's Fund provided primary insurance with a $2 million limit, and an umbrella policy with a $3 million limit. Ace American provided the Warner Brothers entities an excess policy with a $50 million limit.

    Fireman's Fund defended the Warner Brothers entities. Franco made settlement demands within the limits of Fireman's Fund's policies. Fireman's Fund refused such demands. Subsequently, Franco settled the lawsuit for an amount substantially in excess of policy limits. Fireman's Fund consented to the settlement and contributed to it. Ace American funded the amounts in excess of Fireman's Fund's policies' limits.

    Ace American then filed suit against Fireman's Fund for equitable subrogation and breach of the covenant of good faith and fair dealing. Fireman's Fund demurred. Fireman's Fund argued an excess insurer could only sue for equitable subrogation if there was a judgment against the insured that exceeded the limits of the primary policy. Because the Franco lawsuit had settled and there was no judgment against Warner Brothers, Fireman's Fund argued, Ace American could not sue for equitable subrogation.

    The California Court of Appeal noted that an insurer's cause of action for equitable subrogation included the following: Ace American had paid the claim of the insured, Warner Brothers, to protect its own interest and not as a volunteer; Ace American suffered damages caused by Fireman's Fund's act or omission; and Ace American's damages were in a liquidated sum. The appellate court found no reason to hold that either Warner Brothers or its assignee, Ace American, must suffer a loss due to Fireman's Fund's failure to reach a reasonable settlement with no remedy simply because the case settled instead of being litigated through trial. Ace American's alleged damages were clear, liquidated, and certain.

    The court noted that most other jurisdictions that had considered the issue found that an insured or excess insurer that contributes to a settlement can pursue the primary insurer for failing to accept reasonable settlement within primary limits. The court cited the Hawaii Supreme Court's St. Paul decision, noting the case involved a post-verdict settlement in excess of primary limits. The Hawaii Supreme Court stated "the public interest in encouraging reasonable settlement is best serviced by permitting an excess insurer to seek relief under the doctrine of equitable subrogation." St. Paul, 135 Haw. at 456. 

    Therefore, the court reversed the judgment sustaining Fireman's Fund's demurrer, and remanded the case for further proceedings.

No Coverage for Faulty Workmanship Causing Property Damage to Insured's Product Only

    The Nebraska court found there was no coverage for rebar that did not meet specifications and did not cause property damage to other portions of the construction project. Drake-Williams Steel, Inc. v. Cont'l Cas. Co., 2016 Neb. LEXIS 116 (Neb. Aug. 5, 2016).

    The general contractor was hired by the city to build an arena. Drake-Williams Steel, Inc. (DWS) was hired to supply rebar for the arena. The rebar was improperly bent when it was fabricated by DWS and did not conform to the terms of the contract. The rebar was incorporated into three components of the arena: the columns, the grade beams, and the pile caps. The pile caps were made of concrete with reinforcing rebar and were installed below ground level on top of the concrete piles that extended to the bedrock. The grade beams were also made of concrete and rebar. The beams formed an oval around the arena and connected different pile caps together and were also installed below ground level. No corrections were made to the grade beams. 

    The rebar was bent by DWS at too tight a radius. Because of its incorrect radisu, the rebar had approximately 50 percent of its normal reinforcing capacity. The nonconforming rebar that had not been cast in the concrete pile caps was removed and replaced by DWS. DWS made no claim on this replacement. But some of the rebar could not provide the required structural support. If the pile caps were not modified, they would not provide the support required. New concrete was poured to the sides of the pile caps to make the existing pile caps wider. This made the pile caps suitable for their intended purpose. DWS paid the general contractor $1.3 million for the correction. 

    The insurers denied coverage. The trial court granted summary judgment for the insurers. 

    On appeal, the Supreme Court found there was no "property damage." The concrete and rebar were part of the integrated system of pile caps. There was no "physical injury" to the rebar or the pile caps in which the rebar was cemented. The improperly bent rebar still performed a structural reinforcement but was not as strong as it would have been if bent correctly. Because the defective rebar was discovered before the arena was further constructed, there was no damage to other parts of the system. And because the pile caps could be modified to meet the contractual requirements, rather than destroying and rebuilding the pile caps, there was no physical damage to the pile caps themselves. Accordingly, the insured's defective work product did not damage other property. The inadequacies of the product could be remedied through modification of the integrated pile caps, so as to conform to the required specification.

    Therefore, there was no "property damage." Summary judgment in favor of the insurers was affirmed. 

Attorneys' Fees Awarded as Part of "Damages Because of Property Damage"

    The federal district court for the district of Hawaii found that an arbitrator's award of attorneys' fees was part of the "damages because of property damage" and covered under a CGL policy. Ass'n of Apt. Owners of the Moorings v. Dongbu Ins. Co., 2016 U.S. Dist. LEXIS 110283 (Aug. 18, 2016 D. Haw).

    The Moorings AOAO was the named insured under the policy issued by Dongbu. Jo-Anne and Brent Braden, owners of a residential unit at the Moorings, filed a demand for arbitration against the AOAO. The Bradens alleged that the AOAO had failed to repair and maintain their lanai roof, which caused water damage to their unit. The arbitrator awarded the Bradens $6,103.49 in special damages, which was the amount they paid to repair their roof and interior damage. The arbitrator also awarded $85,644.30 in attorneys' fees and $8,515.91 in costs to the Bradens.

    Dongbu reimbursed the AOAO $6,203,49 in special damages and $8,515.91 in costs, but refused to reimburse for the attorneys' fees award. Dongbu contended that the award of attorneys' fees was not covered under the policy because the fees did not constitute "bodily injury," "property damage," or "personal and advertising injury" as those terms were used in the policy.The AOAO filed suit, seeking a judgment for the $85,644.30 awarded in fees by the arbitrator and prejudgment interest.

    The district court found it was undisputed that the AOAO became legally obligated to pay the attorneys fees award when the state court confirmed the award. Further, it was undisputed that the arbitrator found the Bradens suffered property damage due to leaks in their lanai roof. It was also undisputed that Dongbu reimbursed the AOAO pursuant to the policy for special damages and costs awarded by the arbitrator. The sole question was whether the arbitrator's award of attorneys' fees constituted "damages because of . . . [the Bradens'] 'property damage.'"

    The court found that (1) the AOAO became legally obligated to pay the attorneys fee award when the state court confirmed the arbitration award and (2) the Bradens' property damage constituted "property damage to which this insurance applies" insofar as Dongbu reimbursed the AOAO for the special damages awarded by the arbitrator. Further, the fees award was restitutive payment to the Bradens and flowed from their property damage. But for their property damage, they would not have pursued arbitration and been awarded fees.

    Dongbu did not challenge the request for prejudgment interest, so this was also awarded. Judgment was entered for the AOAO in the amount of $85,644.30 plus prejudgment interest.